Hectic February on the cards for IG after record January

2 min read
Americas, EMEA
Sunny Oh

After record investment-grade issuance in January, the currently receptive market for corporate borrowers could lead to bumper crop of bond supply in February, a typically quiet month for the asset class.

That's according to Bank of America analysts who in a Monday note estimated US investment-grade bond supply could come in the US$160bn–$170bn range. Syndicate bankers polled by IFR are expecting a slightly smaller US$130bn–$140bn of issuance next month, but that is still well beyond what is usually expected for February. Average issuance in the past five February months have come in at US$118.5bn, according to IFR data.

Market participants said record volumes for the second month of the year are possible but not very likely, at least based on historical precedence.

In the past, February has not drawn much supply because many non-financial companies are still in earnings blackouts, said Natalie Trevithick, head of US investment-grade credit strategy at Payden & Rygel.

But Bank of America analysts noted strong investor demand, relatively attractive borrowing costs and the potential for increased merger and acquisition-related bond volumes are reasons to expect an unusually hectic month ahead.

To be sure, the US bank's forecast would represent a drop-off from January, when borrowers booked US$196.17bn of high-grade issuance, according to IFR data.

Whatever happens next month, market participants do expect M&A-related issuance to boost supply this year. Some large high-grade companies have relied on the loan market to finance acquisitions, with expectations that they would later term out the debt in the bond market when lower borrowing costs are available.

The favorable conditions already appear to be here. The average US investment-grade yield was at 5.23% on Tuesday, down sharply from the October high of 6.44%, according to BofA index data.

Yet issuers may not think that borrowing costs are low enough. Executives betting that US Federal Reserve will significantly cuts interest rates later this year may want to wait well past February to sell jumbo bonds.

“If the Fed is cutting as much as the market is expecting, you should expect lower financing rates down the road," said John Sheehan, a portfolio manager at Osterweis Capital Management. “I would be in the camp that February tends to be a little quieter."