May 19, 2023 - Economy

It's the busiest week of the year for the bond market

U.S. investment-grade bond issuance
Data: PitchBook LCD; Chart: Thomas Oide/Axios

It’s shaping up to be the busiest week of the year so far for investment-grade corporate bond deals.

Why it matters: It’s one way the looming risk of a U.S. debt default is showing up in the markets. Borrowers are trying to squeeze in deals before any potential disruption from the debt ceiling drama.

What’s happening: As the chart above shows, deal activity was already trending up over the first two weeks of May as companies pulled forward some pretty significant borrowing needs, says Tim McCann, who runs BNP Paribas' investment-grade debt syndicate.

  • Case in point: Pfizer just completed a $31 billion bond deal to fund its pending acquisition of Seagen, in the fourth-largest U.S. corporate bond deal ever.
  • The acquisition isn't actually slated to close until late this year, so Pfizer could have waited to tap the market if it wanted to.

Looking ahead: It's not just the debt ceiling — there are other risks to waiting, too, McCann says.

  • For one, company execs generally aren't optimistic that rates will head back down this year (even though swaths of the market want to believe they will). Rates — specifically the 10-year Treasury note — are one part of their cost of capital.
  • Those in C-suites also think spreads are likely to widen later this year, since calls for recession — even if just a mild one — still linger. Spreads — or the amount a borrower has to pay over Treasuries, a gauge of actual credit risk — are the other part of companies' interest costs.

Add it together, and the math says companies should borrow sooner rather than later.

Worth noting: It’s not just that the near future seems risky. It’s also that the state of the bond market right now is actually pretty good.

  • Though spreads spiked an unusual degree when Silicon Valley Bank failed in March — and bond issuance came to a screeching halt for a week — that bout of volatility is pretty much over, McCann says.
  • Meanwhile, the 10-year has come down to a more attractive level — it's at 3.6% now compared to over 4% in March.
  • And with the market pretty active at the moment, that means good visibility ahead of time on the pricing and sizing of deals. That’s something companies prioritize — no surprises after they launch their deal to market. Certainty of execution, as they say in the biz.

But, but, but: The nearest wild card that could change all that is fallout from a debt ceiling deal (or lack thereof).

The bottom line: The stock market may be largely shrugging off the risks of a looming debt ceiling standoff — but as the saying goes, look to the bond market for the warning signals.

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