Rising Treasury yields stimulate more US corporate bond issuance

Written by Shankar Ramakrishnan and Matt Tracy

(Reuters) – U.S. corporate debt markets continued to be weighed down by new bond offerings on Wednesday as rising Treasury yields increased demand for debt and prompted companies to get their financing done now before any further increase in borrowing costs.

The first seven days of the year saw about $75 billion in investment-grade bond supply — the busiest during the first full week of a new year in history, BMO Capital said in a report.

This number is expected to rise with three more companies and about eight sovereign and supranational bond offerings scheduled to be priced on Wednesday, according to Informa Global Markets data.

“There is a rush among companies to get their financing done now to avoid increasing borrowing costs with Treasury yields rising steadily over the past week,” said Clayton Trick, head of portfolio management at Angel Oak Capital Advisors.

The price of investment-grade bonds at a premium over risk-free U.S. Treasury securities.

There are concerns that the sell-off in Treasuries and the rise in the dollar sending shockwaves through financial markets could continue as uncertainty grows over US President-elect Donald Trump’s policies and their impact on the US interest rate easing cycle.

However, investor demand for higher yields has been putting strong pressure on corporate credit spreads and in some ways offsetting the impact on funding costs due to higher yields.

Normally, issuance volumes would have been expected to taper off after a supply rush that would push spreads wider, but this time with higher yields driving higher demand, Hans Mikkelsen, credit strategist at TD Securities, said. Differences are shrinking again.

So, rising yields and narrowing profit margins are expected to help both issuers and investors, and keep the current issuance frenzy alive which is expected to resume after a short lull.

A brief session on Thursday in honor of the late 39th US President Jimmy Carter and the release of jobs data on Friday are expected to slow releases.

US companies are also refraining from issuing bonds before announcing profits that are expected to start flowing later this week.

Bankers expect to raise between $175 billion and $200 billion in new bond offerings in January. If volumes reach $200 billion, it will be only the fifth time in history that monthly issuance exceeds this figure, according to Informa Global Markets data.

(Reporting by Shankar Ramakrishnan and Matt Tracy; Editing by Nick Zieminski)