Wednesday, September 15, 2021
With summer (un)officially over, investment-grade corporate bond sales are ramping up again. Despite a four-day week last week, thirty-eight investment-grade companies sold $60.5 billion in the first two sessions, breaking a record for the number of borrowers to come to market over that span. As seen in the LPL Research Chart of the Day, that takes year-to-date issuance up to $1.1 trillion through Sept 10. The $1.1 trillion is already more than the annual issuance in 2010, 2011, and 2012 and in line with 2013—with 3 ½ months still to go. We’re unlikely to see a repeat of 2020, which had the heaviest new issue calendar year ever with nearly $2 trillion of debt issued but it looks like we may get close to 2017 levels, which was the second highest year at $1.4 trillion.
“A lot of companies have been able to take advantage of really cheap financing, which should help set them up for future growth,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But credit spreads already reflect a lot of that good news.”
Companies are locking in low interest rates and taking advantage of the global search for yield. And for many companies, this deluge of debt issuance isn’t because they need the cash. Large-cap companies, as proxied by the companies in the S&P 500 Index, are flush with cash. According to Bloomberg, as of June 30, S&P 500 companies, in aggregate, had nearly $655 per share in cash and equivalents on their balance sheets, which is up from $460 per share as of the end of 2019. While debt loads have increased, net debt levels (long-term debt minus cash) are in line with historical averages and interest coverage ratios have improved recently because of the low interest rates on this newly issued debt. So while debt levels have increased, companies’ ability to service that debt remains manageable.
As a consequence of companies issuing all this debt and extending debt maturities, the interest rate sensitivity of the corporate bond index has increased. This makes investing in corporate debt prone to increased interest rate volatility. Additionally, with a 2.0% yield-to-worst for the corporate index, the yield is near the lowest it has ever been. Since 2009, yields have only been lower 6% of the time—meaning valuations are in the top decile in terms of expensiveness.
We are currently neutral on investment-grade corporates because of the increased interest rate sensitivity and lofty valuations. Currently, we think a benchmark weight to the corporate sector is about right. For investors using the Bloomberg Barclays Aggregate Index, a 25% allocation within a 100% fixed income portfolio likely makes sense (depending on risk and return objectives). However, we like the short-to-intermediate part of the corporate curve as it tends to have less interest rate risk.
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