Anticipated Increase in Issuance
Investors and other market participants are now predicting a higher volume of bond issuance in the upcoming year. Their expectations are based on the anticipation of a more rapid pace of interest-rate easing following the Federal Reserve meeting last week.
The combination of increased U.S. Treasury buying and a tightening of credit spreads has resulted in lower borrowing costs for companies. With continued spread tightening, there is a projected increase in high-grade bond supply next year, predominantly driven by refinancing needs, according to Steven Oh, global head of credit and fixed income at asset manager PineBridge Investments.
Yield Impact and Market Forecast
Since the Federal Reserve meeting, high-grade corporate bond yields have fallen by 36 basis points. The officials’ forecast of a median 75 basis points in net rate cuts for next year has shaped market sentiment.
Markets are now pricing in less than a 70% chance of a Fed rate cut by March. This earlier timeline, compared to previous expectations, further supports the case for a pick-up in investment-grade issuance in 2023.
However, some market participants believe that the total issuance for 2024 will align with this year and last, challenging the prevailing outlook. Natalie Trevithick, head of investment-grade credit strategy at asset manager Payden & Rygel, states, “We don’t see a significant change in the forecasted supply for 2024.” She adds that companies typically only refinance a small percentage of their outstanding debt on an annual basis.
Favorable Market Dynamic for Borrowers
Despite differing views on future issuance, lower borrowing costs and increasing investor appetite for riskier corporate debt have shifted the market dynamic in favor of borrowers. The market sentiment reflects the belief that the Federal Reserve is nearing the end of its hiking cycle, providing investors with a sense of security in owning corporate bonds, according to Trevithick.