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Turmoil in government bond markets has forced US companies to delay borrowing plans, making this the slowest October for debt issuance in more than a decade.
US firms have raised just under $70bn from sales of bonds and leveraged loans so far this month, the quietest month so far this year and the weakest pace of borrowing in any October since 2011, according to data from LSEG. By number of deals, the total of 50 is the lowest at this point in the month in records going back 20 years.
Bankers say the sharp rise in Treasury yields over the past month, which has fed through to higher corporate borrowing costs, has put off companies from tapping debt markets unless they have to.
“Anyone who was thinking about opportunistically coming into this market is taking a step back,” said Richard Zogheb, global head of debt capital markets at Citi.
The 10-year Treasury yield this week climbed above 5 per cent for the first time since 2007 — up from less than 4 per cent just three months ago — driven by expectations that the Federal Reserve will keep interest rates higher for longer.
The rise has fed through to borrowing costs faced by corporate America. The average yield on US investment-grade bonds now stands at 6.3 per cent, up from 5.6 per cent in late July, while junk bonds now yield 9.4 per cent — up from 8.4 per cent, according to Ice BofA index data.
“[Companies are] saying, ‘look, I get it: rates are going to be higher for longer. But we’ve had such a dramatic move in such a short period of time, I’d like to watch it a little bit and make sure that it’s here to stay’,” Zogheb said.
The decision to wait highlights how corporate funding plans are being directly affected by shifting expectations of Fed policy. Many businesses stretched out the maturity of their debt during the period of low rates after the pandemic, and have the luxury of waiting before returning to debt markets.
But others that have already pushed back bond issuance plans — particularly those with very weak credit ratings — may struggle to wait much longer.
“There have been a number of borrowers that have already delayed their financing three or four months ago,” said one senior debt banker. “And now [borrowing costs have] moved against them another [percentage point].”
Issuance was widely expected to ease in this month following a strong September.
“We have a little bit of a cushion that’s been built up,” said Matt Mish, UBS’s head of credit strategy, who added that the third-quarter earnings season currently in full swing would typically slow the pace of borrowing.
But the rise in Treasury yields — which act as a benchmark for borrowing rates across the economy and have experienced some dramatic daily swings — has exacerbated the slowdown.
“When you have [Treasury market] volatility, that makes it really hard for investors to price risk,” said John Gregory, head of Wells Fargo’s leveraged syndicate. “And so everybody just kind of says, ‘hands off — let’s see how this all settles out’ — because they don’t know what the true outcome is going to be.”
Still, some borrowers may view the recent rise in Treasury yields as motivation to get deals done before costs escalate further, according to Teddy Hodgson, global co-head of Morgan Stanley’s investment-grade debt syndicate.
“Where there is a concrete use of proceeds — meaning an acquisition, or a maturity or something specific that a company needs to raise debt for — I think actually the move higher in yields is probably providing some catalyst for an acceleration of plans,” he said. “[They’re saying], ‘I want to get this done as soon as I can, because yields could continue to go higher’.”
Civitas Resources and Norwegian Cruise Line Holdings are among the speculative-grade borrowers to have issued bonds this month. Civitas’ $1bn deal was done to help finance its acquisition of assets from Vencer Energy, while Norwegian’s $790mn deal will help to repay existing debt.