Companies are rushing to meet their financing needs ahead of this year’s U.S. elections, aiming to get ahead of potential market volatility in the final stages of the presidential race.
Corporate borrowers have issued $606 billion worth of dollar bonds so far this year, according to LSEG data, up two-fifths from the same period in 2023 and the highest total since at least 1990.
Bankers and investors said companies were motivated to borrow by the lowest spreads in years – referring to the difference between yields on U.S. corporate debt and those on equivalent government bonds.
But they added that the prospect of a close election had pushed companies to move forward with their plans, rather than risk finding themselves in potentially more expensive markets later in the year.
“We’re about two months ahead of what I consider a normal timetable for investment-grade debt issuance,” said Teddy Hodgson, co-head of Morgan Stanley’s global investment-grade debt syndicate. . “I certainly think the election is a driving force for this whole deal.”
The rush to issue corporate bonds reflects the movements of traders betting on futures contracts linked to the value of the Vix index – the “fear gauge” that measures expectations of short-term fluctuations in the benchmark S&P 500 index.
Although they cannot trade the Vix directly, investors can purchase futures contracts at prices reflecting where they expect the Vix to trade at different times over the coming months. Analysts say traders are anticipating increased market tensions several months earlier than usual, before the election. Bond yield spreads are often an indication of risk.
US credit spreads have tightened significantly since early January, helped by “technical” forces, including strong demand for new securities among yield-hungry investors, following a lull in debt issuance in 2022 and 2023.
The average spread for investment-grade bonds now stands at just 0.93 percentage points, according to Ice BofA index data. This is its tightest level since November 2021 and just 0.14 percentage points away from the tightest level in 19 years. The average spread for high-yield or “junk” bonds is hovering at 3.12 percentage points, around its narrowest level since December 2021.
“It’s a very good market,” said John McAuley, Citi’s head of debt capital markets for North America. “What we’re seeing overall is higher volumes and tighter spreads – better access for businesses. »
McAuley said investors were betting on a much more favorable economic outlook than the “hard landing” feared by many last year. Markets are now pricing in expectations that the Federal Reserve would make cuts of 0.75 percentage points this year after aggressively tightening monetary policy to curb inflation.
Companies in various sectors have sold bonds this year. Financing businesses of various high-profile auto groups have tapped lenders for several deals, including Ford and Toyota. Several banks, including Morgan Stanley, JPMorgan and Standard Chartered, also issued debt in the first quarter.
Construction groups, including Caterpillar’s financial services arm, have also entered the market, with some companies already tapping lenders multiple times in the first three months of 2024.
“I think what most companies are thinking – especially frequent issuers – is ‘let’s do the majority of our financing in the first half of 2024,’” said Morgan Stanley’s Hodgson. “[Then] If we go through the election and the market response is positive for whatever reason, we will use the end of the year to get a head start on 2025.”
Some sectors are considered more sensitive than others to the results of the November 5 election, according to some market participants, including healthcare, energy and companies exposed to China. Others noted that the companies would also monitor the legislative elections.
John Hines, global head of investment-grade debt capital markets at Wells Fargo, noted that borrowers “generally tend to complete their annual financings before the fourth quarter.”
Still, he said, ahead of the election, “combined with a potential economic slowdown in the second half of the year – when you think about the risks of issuing now, when coupons are reasonable.” . . and credit spreads are at historically tight levels, risking immediate execution rather than waiting. . . it seems prudent to remove the chips from the table now.
Uncertainty over market conditions has also accelerated fundraising and activity, bankers said, with some pointing to busy IPO pipelines over the coming months as companies aim to go public before the elections. Online social forum Reddit and Donald Trump’s own social media site successfully went public in March, potentially paving the way for more companies to follow suit.
Stock traders have started betting on a surge in volatility around the election.
“I expect this to contribute to significant volatility as we approach election day itself,” said Kristina Hooper, chief global market strategist at Invesco. “But what we’ve seen historically is that elections don’t really matter, just like other long-term geopolitical crises.”
Borrowing in the convertible bond market has also increased sharply. Sales of converts, debt instruments that can be exchanged for equity if a company’s stock price hits a pre-agreed level, have jumped by more than half this year to $17 billion.
“It’s really a nine-month year from an emissions perspective,” said Richard Duffield, head of equity-linked capital markets at Citi. “A lot of issuers are saying, ‘The fourth quarter is a failure.’ . . I just don’t know what the election is going to look like, I don’t know what the market is going to look like – I want to avoid that volatility.
This story has been edited to clarify the job titles of John McAuley and Richard Duffield at Citi.