Rushing to take advantage of historically low interest rates while they can, investment grade corporate borrowers across the globe have sold new bonds worth the equivalent of at least $150 billion so far this week, the most ever for the opening week of September. Among the blue chip companies taking part in the selling frenzy are Berkshire Hathaway Inc. (BRK.A), The Walt Disney Co. (DIS), Apple Inc. (AAPL), Chinese conglomerate Dalian Wanda Group, and Italian natural gas company Snam SpA, according to several detailed stories in Bloomberg as outlined below.
“The global primary pipeline has surged back to life, with investment-grade issuers looking to take advantage of low Treasury yields and tight spreads," says Mark Reade, head of fixed-income research at Mizuho Securities Asia in Hong Kong. Corporate bond issuance was particularly slow in August, partly the result of rising U.S.-China trade tensions, slowing global economic growth, and political unrest in Hong Kong.
Significance For Investors
However, the start of September has been marked by optimistic turnabouts on all these fronts, Bloomberg notes. The U.S. and China have agreed to resume trade talks early in October. The latest batch of statistics has prompted some renewed confidence in U.S. economic growth. Finally, a bill providing for extradition to China that had spurred mass protests in Hong Kong has been withdrawn.
- Issuance of investment grade corporate bonds is at record levels.
- New weekly records have been set in the U.S. and worldwide.
- Falling interest rates are spurring companies to refinance.
- Other factors are positive developments in trade and the economy.
“This is a great time for companies to refinance,” according to Christian Hoffmann, a portfolio manager at Thornburg Investment Management, per another Bloomberg report. “Financing costs are near all-time lows, so I would not be surprised to see better high-yield companies coming to market and treating debt capital markets like a cheap buffet,” he added.
The average yield on investment grade bonds was 2.77% as of Sept. 4, down from 4.3% in late Nov. 2018, per Bloomberg Barclays index data. This is the lowest average rate since 2016, per Bloomberg. As a result, the annual interest expense on $1 billion of newly-issued debt is now lower by $15.3 million, before taxes. Meanwhile, junk bonds rated BB, the most creditworthy segment of the high yield market, now yield a near record-low of 4.07%.
In the U.S. alone, sales of new investment grade corporate bonds have reached $74 billion so far this week, the largest figure for any comparable period based on data since 1972. Amid this rush, 49 U.S. corporate bond issues came to market in one 30-hour span.
The prior weekly record for investment grade corporate bond issuance in the U.S. was $66 billion during the week of Sept. 9, 2013. The bulk of that action was provided by Verizon Communications Inc. (VZ), which accounted for $49 billion of that total, in the largest corporate debt offering ever.
Companies that can refinance at lower rates right now are boosting their profit margins, putting themselves on a more solid financial footing to ride out the next economic and market downturns. “If someone has near-term financing needs, they should be looking to take advantage of this window,” says Jenny Lee, co-head of leveraged loan and high-yield capital markets at JPMorgan Chase & Co., per Bloomberg. “Things potentially could shut down or get more difficult as we head toward the back half of this year,” she added.