Corporate bond issuance surges in 2024, on track to hit $1.5T in 2025 - Goldman Sachs

seekingalpha
2024-11-03

John Rensten

This year is on track to be the second-busiest on record for corporations issuing investment-grade U.S. bonds, and 2025 could see borrowers issuing $1.5T or more of corporate bonds, according to a report by Goldman Sachs Global Banking & Markets.

Companies and corporate borrowers this year have looked to take advantage of ample liquidity and cheaper borrowing costs to issue debt ahead of potential volatility following the U.S. presidential election and more anticipated Federal Reserve interest rate cuts.

"There are several reasons corporate debt offerings have been so plentiful. Many corporate treasurers and CFOs took care of their financing early this year to avoid the risk of a spike in volatility around the time of the U.S. election," John Sales, head of investment grade syndicate in the Americas in Global Banking & Markets, said last week.

"At the same time, funding conditions for the vast majority of this year have been about as good as you could ask for," Sales added.

"There are signs that the momentum in bond offerings will continue. Between the annual need to refinance more than a trillion dollars of maturing debt and an increase in financing amid solid economic growth, it’s reasonable to expect borrowers to issue $1.5T or more of corporate bonds in 2025 and potentially in coming years," Sales said.

"If the economy is growing, if companies are growing, if balance sheets are growing, you will see debt to finance that growth," he added.

In fact, it has not just been U.S. firms and corporate borrowers that have been jumping onto the debt bandwagon. There has been healthy bond issuance activity in Europe as well.

"Since the beginning of 2023 the investment-grade corporate bond segment on both sides of the Atlantic has been in very good shape. Spreads are now back at significantly lower levels," Björn Jesch, global chief investment officer at Zurich-based asset manager DWS, said back in June.

Last week, S&P Global said it expects global bond issuance to rise 17% in 2024, to roughly $9T, and another 4% in 2025. "Bond issuance has been very strong in 2024, despite rates remaining historically high and many geopolitical stressors increasing," S&P Global had noted.

Citing Bloomberg, Goldman Sachs Global Banking & Markets highlighted how attractive U.S. corporate bond spreads have become in the chart below:

"These are the best spread levels our issuers have seen in the last 20 years," Goldman Sachs' Sales said.

"The only comparable spreads came in the summer of 2021, when market volatility had evaporated and the Federal Reserve’s policy rate was near zero. That's a big reason why folks are jumping to lock in the current rates," he added.

Goldman Sachs spotlighted the role played by mergers and acquisition activity in boosting bond issuance. According to the bank, U.S. investment-grade bond sales linked to corporate acquisitions this year are one track for their highest volume since 2019.

Sales said U.S. GDP growth was supporting corporate bonds as well. The government this week in an advance estimate said Q3 GDP increased at an annualized rate of 2.8%. Sales said the robustness in the economy was a "primary reason" why the $1.4T in corporate bond issuance this year topped expectations.

"What you are seeing, plain and simple, is growth," Sales said.

"You're seeing growth in the economy. You're seeing growth in corporate America. You're seeing growth of the balance sheet. And as companies grow, they issue debt to finance that growth," he added.

For investors looking to track the fixed-income markets, here are some exchange-traded funds of interest linked to Treasury yields and bonds: (TLT), (TLH), (IEF), (IEI), (SHY), (SGOV), (SCHO), (BIL), (AGG), (BND), (VCIT), (MUB), (MBB), (JNK), (LQD), (HYG), and (TIP).

More on the bond market

  • The October Jobs Report Could Push Rates Much Higher
  • Wall Street Lunch: The Job Market Implosion That Keeps Getting Delayed
  • The Manufacturing Sector May Be Left Behind As Yields Rise
  • Vanguard forecasts a soft landing and anticipates that yields may rally before retracing
  • Yields and rates, a tale of two stories as the US10Y hits highest level since early July

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