(Bloomberg) — Surging yields are spurring at least a few blue-chip companies to delay US bond sales, a sign of how falling Treasury prices are rippling into other markets.
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Ten companies sold $11.7 billion of high-grade bonds in the US on Monday, but at least a few borrowers elected to wait to see if yields end up falling in the coming weeks, according to Bloomberg News strategist Michael Gambale. Just six offerings are in the market on Tuesday.
Some issuers are waiting until after December’s consumer price index reading hits on Wednesday, which could provide more clarity on the Federal Reserve’s path for interest-rate cuts. The biggest US banks will also start posting quarterly results on Wednesday, with JPMorgan Chase & Co. and Goldman Sachs Group Inc. among the firms set to report.
“We’ve certainly had a pretty strong January so far in terms of primary issuance, in terms of the pace,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors. “But you would expect to see a bit of a lull this week.”
Meanwhile, the junk bond and leveraged loan markets have been busy and are seeing another relatively active week for sales in the US, with companies looking to get ahead of any potential volatility that may arise after Wednesday’s inflation report.
US Treasury yields have been climbing for most of January, with the benchmark 10 year edging about 0.015 percentage point higher to around 4.80% on Tuesday.
Wait and See
Companies have sold $88 billion of investment-grade bonds in the US this year through Monday’s close, compared with estimates for the month of about $175 billion. Bank earnings will set the tone for corporate issuance and investor appetite going forward. But for now, the primary market remains healthy, just choppier, with rates moving higher.
Borrowers may be choosing to wait simply because they can, even if there is a risk that yields could rise even higher after inflation data hits. The average investment-grade corporate bond yield was 5.54% as of Monday’s close, the highest since July.
“IG borrowers have the luxury of being able to be patient. There is an insatiable appetite for US spread product,” said John McClain, portfolio manager at Brandywine Global Investment Management. He sees high-grade bond spreads tightening as higher yields entice buyers “who are met with less supply from opportunistic borrowers,” he said.
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But others are less optimistic. Issuance tends to be relatively heavy in January. And rising yields will probably make investors less willing to buy longer-term bonds, whose prices are more sensitive to changes in yield than intermediate- and short-term notes, wrote strategists at Bank of America, including Yuri Seliger, in a note dated Friday.
That could show up in fund flow data in the coming weeks, setting corporate-bond funds for a wave of outflows if Treasury yields continue to climb, JPMorgan strategists including Eric Beinstein and Nathaniel Rosenbaum wrote in a note on Monday. Bond flows tend to be closely correlated with total returns when corporate debt gains or loses more than about 2.5% over three months, the strategists wrote.
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