US corporate borrowers try to navigate volatility

(Bloomberg) – The recent slowdown in new corporate bond sales is expected to continue into next week as borrowers navigate volatility and an increasingly hawkish Federal Reserve.

Wall Street expects $15 billion to $20 billion in new sales of high-quality bonds, according to an informal survey of debt underwriters. While consensus forecasts for the past four weeks have stabilized around that same amount, actual supply has been less as the Fed’s plan to hike rates has cooled the primary market.

Volatility makes it harder to sell new debt, and issuers have failed to come to market on several days in recent weeks. Yet when borrowers have decided to go ahead, the results have generally been favorable.

St. Louis Federal Reserve Chairman James Bullard fueled the selloff in rates in markets on Thursday when he said he supported a full one percentage point hike by early July after a higher than expected rise in inflation in January. The 10-year Treasury yield hit 2.06% on Friday, the highest since July 2019.

Despite large total return losses this year due to rising Treasury yields, credit spreads have remained relatively contained. The Bloomberg US Investment Grade Index spread narrowed two basis points this week through Thursday, to 106 basis points.

“We are somewhat surprised that spreads have not reacted more to changing expectations for rate hikes,” Barclays Plc strategists led by Bradley Rogoff wrote on Friday. “We think more rate hikes could lead to weaker growth, which could potentially hurt company fundamentals.”

These same fundamentals, which many strategists believe would support credit at the start of the year, likely explain the resilience of credit spreads.

“We view the resilience of IG spreads as no fluke as positive technical and fundamental factors balance the headwind of a change in monetary policy regime,” Citigroup Inc. strategists led by Dan wrote on Friday. Sorid.

A heavy earnings slate next week includes premium issuers Walmart Inc., Deere & Co., ViacomCBS Inc. and NVIDIA Corp.

High performance

The junk bond market is quiet heading into the week, with no known trades going on.

The backdrop is volatile after falling stocks and rising Treasury yields fueled losses across all ratings in the junk bond market on Thursday. BBs, the most rate-sensitive segment of the junk, posted their biggest one-day loss in 20 months.

Cautious investors pulled money out of junk bond funds, with retail funds reporting an outflow of nearly $2 billion for the week ended Feb. 9, according to Refinitiv Lipper. It was the fifth consecutive week of junk bond outflows.

Leveraged loans are another story. Floating rate debt has seen strong demand as investors seek assets that can perform well when rates rise. Lending funds attracted $2.3 billion in cash in the week ended Feb. 9, a new record high.

However, some transactions have run into difficulties. Barclays-led banks have again softened prices and given investors more time to commit to buying loans for drugmaker Covis Pharmaceuticals Inc. as the deal struggles to find buyers. Entries were due Friday.

Looking ahead, at least 11 loan agreements have commitments due next week.

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