November 30, 2022

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U.S. Investment-Grade Bond Dealers See Sales Swell After Rout

(Bloomberg) — Investment-grade issuers may sell bonds at a faster pace next week after market volatility had pushed many borrowers to the sidelines over the past month.

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Estimates for next week’s U.S. high-grade bond sales call for $25 billion to $40 billion. That’s well ahead of this week’s sales, which fell shy of consensus for the second week in a row because of wild swings in risk-asset prices.

Considering the pent-up supply after issuers stood down, and the fact that most syndicate desks were anticipating $125 billion to $150 billion of fresh debt in May, it’s likely many will try to come back to market in the next possible window. Borrowing costs are expected to keep rising, giving companies incentive to knock out funding plans while they can.

Fear is mounting in credit markets, as worries about slowing economic growth and faster inflation send risk measures to levels not seen since the coronavirus pandemic first roiled investors. Barclays Plc revised its investment-grade spread forecast wider to 145 to 150 basis points by the end of the year, compared with its previous forecast of 95 to 100 basis points, due to the growing worries.

Corporate bond yields are just a few percentage points away from pandemic peak highs, and could even reach those next week.

In the near term, the market will continue to react to big swings in stocks and U.S. Treasuries. The April consumer product index report, due May 11, may be another catalyst for markets.

Junk Under Pressure

Some borrowers in the U.S. leveraged-loan market started to feel the heat from the volatility upending other markets Thursday and Friday after demand in the primary loan market started to fizzle following the Federal Reserve’s biggest rate increase in two decades.

Still, issuers see an opportunity to take out the debt as demand in the primary market has remained steady throughout April, though subdued compared to last year, and loan prices stood far more resilient compared to fixed-rate corporate bonds. Those prices dipped only slightly after the Fed’s rate hike, supported still from their floating-rate structure that offers investors more protection when rates rise.

There are at least nine deals in syndication, including a $1.6 billion offering for the acquisition of cybersecurity company Barracuda Networks by KKR & Co. from Thoma Bravo LLC.

U.S. junk bonds were headed for the fifth straight week of losses as yields rise to a two-year high of 7.14% after credit risk jumped the most in two years. Supply has shrunk to the lowest in more than a decade, with year-to-date bond sales at just $54.1 billion, Bloomberg-compiled data show. The U.S. junk bond index posted losses of 0.36% on Thursday and the month-to-date losses stood at 0.54%. There are no deals in the pipeline for next week.

But for savvy secondary-market junk investors, there are still some deals that can be found and investors may start looking to come back. With yields now above 7%, the market is becoming more attractive and it’s time “to deploy some capital in high yield,” Bank of America Corp. said in a report Friday. Investors should, however, be aware that more widening is likely to still come, strategist Oleg Melentyev said in the note.

In distressed debt, TPC Group Inc., which began talks about pre-packaged bankruptcy and failed to pay interest on secured notes earlier this year, reports earnings next week.

(Corrects number of loan deals in ninth paragraph in story originally published May 7.)

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