Companies have rushed to borrow tens of billions of dollars this week, a sign that optimism about the outlook for the economy is beginning to take hold.
Dozens of big companies, from BMW (
The post-Labor Day period is typically busy for bankers and traders as they return from summer vacations, but the sharp increase in bond issues in recent days has surpassed expectations, analysts said.
It’s a sign of rising confidence that companies are willing to borrow rather than conservatively manage their debt loads, and investors are willing to lend rather than sit on cash, as concerns about a potential recession diminish.
“There is no question in my mind that the economy is slowing, but there is also no question that it’s not going into recession,” said Andrew Brenner, the head of international fixed income at National Alliance Securities. “The window for companies to borrow is wide open right now.”
The improving sentiment in the bond market echoes the rally in the stock market this year, as investors have become increasingly hopeful that the economy can achieve a so-called soft landing.
Despite the parallels in sentiment, the wave of bond issuance itself weighed on stocks this week. The bumper bond supply pushed bond prices lower, which raises yields. Stock prices are sensitive to increases in interest rates, such as bond yields, because it can raise costs for companies.
The S&P 500 (
The dollar has gained about 5 percent over the past few weeks against the currencies of major trading partners, a sharp move in that market, suggesting that investors are piling into U.S. assets as growth in China falters and the outlook for Europe is underwhelming. Europe’s benchmark Stoxx 600 index has fallen for eight consecutive days.
This week, analysts at Goldman Sachs lowered their forecast probability of a recession in the United States to just 15 percent. A recent survey of investors conducted by Bank of America showed an increase in respondents who want companies to employ more expansive strategies, spending on growth rather than reining in costs and paying down debt.
Some analysts also attributed the rise in bond issuance this week to the potential for borrowing costs to rise further in the months ahead, as the Federal Reserve considers whether to increase interest rates again. And even if the Fed leaves rates alone, a relatively strong economy also makes the prospects for eventual rate cuts more distant.
This week also presented a rare window without the U.S. government flooding markets with newly issued debt, making companies that need to raise cash able to get deals done sooner rather than later.
“There remains more of a conservative mind-set than I think there need be,” said Jonny Fine, who runs investment-grade debt issuance at Goldman Sachs, speaking about the highest-quality, most creditworthy companies. “As a result, a large number of companies want to be first in the queue when supply is expected to be heavy.”
The borrowing binge has also begun to extend to riskier, lower-rated companies, another sign of optimism among investors about the economy.
Still, credit ratings downgrades and defaults picked up in August, according to S&P Global, leading the rating agency to raise its forecast for the share of lowly rated companies that will renege on their debts over the next year in the United States, to 4.5 percent from 3.2 percent over the past year.
The bond uptick also comes as analysts and investors point to a looming “maturity wall,” with some borrowers closing in on deadlines to refinance low-interest bonds if they want to avoid having to repay the debt in full when it comes due.
“Companies have been postponing this unpleasant transition to high borrowing costs but we are getting to this window where time is running out,” said Yuri Seliger, a credit analyst at Bank of America.
However, a number of companies are avoiding locking in high interest rates for lengthy periods, with many recent bonds carrying much shorter repayment timelines than usual, giving companies flexibility to lower their costs if interest rates fall in the coming years.
“It makes sense,” Mr. Seliger said. “If interest rates are really high right now, why do I want to lock that in for 30 years?”