Lower yields may spur heavy borrowing of US top-rated bonds

The Federal Reserve building in Washington, DC. Credit markets reacted favourably to the Fed’s announcement that it will begin tapering asset purchases this month with no rush to raise interest rates.

US investment-grade bond supply is set to remain strong and steady next week, with Wall Street estimates calling for about $25bn of new sales after macro concerns around inflation and rate hikes eased. Credit markets reacted favourably to the Federal Reserve’s announcement that it will begin tapering asset purchases this month with no rush to raise interest rates. Borrowing costs remain dirt cheap for top-rated issuers, who are likely to take advantage and tap the market heavily in the weeks ahead of the Thanksgiving holiday, according to one syndicate desk. “The taper announcement was accompanied by more dovish commentary on rate hikes, which augurs well for credit,” Barclays Plc strategists led by Bradley Rogoff wrote on Friday. Third-quarter earnings results are showing that despite supply chain issues, corporate “fundamentals are robust,” he added. The 10-year Treasury yield sank below 1.5% on Friday for the first time in a month, potentially setting up an issuance window for opportunistic borrowers next week. Retail investors are also getting in on the action. US investment-grade bond funds posted a $429mn inflow during the week ended November 3, according to Refinitiv Lipper. That follows an outflow of $1.1bn the previous week. High-yield funds, meanwhile, saw outflows of about $1.27bn during the five trading days ending on Wednesday, after money was added in each of the prior two weeks. The bond market will be closed on Thursday in observance of Veterans Day in the US. One known deal is in the junk-bond pipeline heading into the week: Oil and gas company Energean Plc’s $400mn note sale to refinance credit facilities and for general corporate purposes. Marketing will continue through Wednesday. Other deals are likely to emerge ahead of Veterans Day, with junk-bond yields falling on a weekly basis for the first time in more than a month. US high-yield bond sales are about $6bn away from a new annual record, which could be reached as soon as next week. Almost $425.5bn of the risky debt has been sold this year, and would need to surpass last year’s $431.8bn volume to set a new all-time high, according to data compiled by Bloomberg. In US leveraged loans, a few companies marketing leveraged loans are beyond their commitment due dates, with no timing or pricing updates given as of Friday morning in New York. They include a joint bond and loan offering for diagnostic medical company LifeScan Inc for a refinancing. Meanwhile, so far about five meetings are on deck. Computer chip equipment supplier Brooks Automation Inc. is selling $1.03bn in term loans to finance its buyout by THL Partners, and TRC Companies is seeking $845 million in term loans for its takeover by Warburg Pincus. At least nine deals are due next week, including Carestream Dental LLC’s $955mn in term loans for a dividend recap, and acquisition deals for Vertex Aerospace LLC, Howden Group, PCI Pharma Services and Apex Group. A typical late-year slowdown has yet to materialise in the US leveraged loan market, as nearly $17bn of new deals – many for acquisitions – came forward this week. Companies continue to tap investors for funding as conditions remain conducive for issuers, however some have encountered pushback as buyers have simply had so much to choose from this year. In distressed debt, Mallinckrodt Plc. will be in court fighting over whether claims tied to price gouging allegations deserve high repayment priority in its Chapter 11 bankruptcy. The fight has been closely watched by debt holders.