US Debt Ceiling Extension Threatens Bond Issuance Momentum

Big US companies have been rolling out bonds at a rapid pace; however, this supply may be hard to sustain because of the anticipated volatility concerned with the extension of the US debt ceiling as well as another possible move higher when it comes to interest rates.

It is well to be noted that the investment-grade-rated firms in May issued $152 billion, thereby making it the busiest May since the last three years when the pandemic prompted the issuance of record debt issuance volume, as per one of the insights. On the other hand, Junk-rated companies, pulled up $22.1 billion in the busiest May since 2021, during which 73 companies went on to raise $49.1 billion.

The industry stalwarts opine that one has seen an acceleration of issuance in May and that all this is due to debt issuance being pulled forward. It is estimated that the forthcoming months may as well see a slight moderation in terms of supply. Notably, the debt issuance spree happens to be on the back of a demand that is strong for comparatively higher-yielding corporate bonds since treasury yields rose in May as compared to the levels that were touched in late April. It is well worth noting that the new investment-grade bonds issued in May went on to receive orders that happened to be three or four times the average offering size.

Besides this, junk bonds also got to have decent demand since yields under 9% were at pretty attractive levels one hasn’t seen for years, either due to the pandemic or the energy crisis scenario prior to that. These happen to be attractive income sources considering the fact that the bonds are issued primarily by those firms measured in the upper portion of junk who have a lesser probability of default.

That said, the debt binge has, however, gone on to give a broad hint that the biggest organisations across the world are not at all optimistic when it comes to borrowing conditions later in 2023. Funding expenditures which are near-term are most likely to surge because of a drain on liquidity, and the Treasury is anticipated to issue almost $1.1 trillion in new Treasury bills in the next seven months so as to replenish the coffers, as per a recent estimate made by a finance giant. It is more likely that credit spreads will get widened in the current scenario given the fact that there happen to be macro concerns when it comes to the debt ceiling as well as the resultant large T-bill issuance that is near-term, also geopolitical risks, and the Fed noose so as to dampen inflation.

Significantly, fed funds futures traders now see the Fed as most likely to go ahead with an interest hike in June rather than leaving them unchanged, as the economic data takes everyone by surprise and the lawmakers seem to have reached a deal so as to raise the debt ceiling.

Some happened to be there who could foresee liquidity becoming a challenge even if the debt ceiling negotiations came to some sort of resolution, especially if the ratings agencies continue to sour on how the negotiations and the situations were handled.

In spite of what looks to be a robust new issue backdrop, there happens to be a higher credit sensitivity as well as a higher bar for less liquid and less familiar issuers. The bar might as well continue to rise as and when there is further market dislocation.