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By Melanie Hilbush, CFA
Companies are taking advantage of strong investor demand in the investment grade credit market.
In just the first two months of 2024, we’ve seen nearly 200 companies issue roughly $380 billion of new bonds in the U.S. investment grade credit primary market.
Monthly issuance totals for both January and February blew away the prior three-year averages of $138 billion and $115 billion, respectively.
Despite spreads entering the year at relatively tight levels, investor demand has been robust, consistent with our view that yield – not spread – is largely driving purchases. (See our recent blog on this theme.)
As a result, we’ve seen little to no new issue concessions and no meaningful supply indigestion.
In fact, the Bloomberg Barclays U.S. Investment Grade Credit Index option-adjusted spread hit 89 basis points on February 22 – its tightest level since November 2021.
After a volatile 2023, the market expected U.S. banks to take advantage of the recent rally and relatively tight spreads. For regional banks specifically, the market was also expecting them to get ahead of issuance related to Basel III Endgame long-term debt requirements.
The primary market is typically dominated by financials to start the year and, while issuance was still skewed to that sector, supply underwhelmed the market’s elevated issuance expectations. Despite pricing with little to no concessions, many of these deals still performed well.
In industrials, supply has come in higher than expected to start the year. We believe some deals that were scheduled for March or later in the first half of 2024 were pulled forward into January and February.
Additionally, we saw several large deals to finance previously announced mergers and acquisitions, including Bristol-Myers Squibb’s (BMY) acquisition of Karuna Therapeutics (KRTX), AbbVie’s (ABBV) purchases of ImmunoGen (IMGN) and Cerevel Therapeutics (CERE), and Cisco’s (CSCO) acquisition of Splunk.
As in financials, many industrial deals this year have priced with minimal concessions but have not met with investor pushback.
Despite relatively tight spreads, we believe all-in yields remain attractive in investment grade credit and continue to drive investor inflows.
Although supply in the long end of the curve increased in February, credit curves remain flat; and at current valuations, we are still finding more value in the intermediate part of the yield curve.
Looking forward, while we do not expect the current pace of issuance to be sustained throughout 2024, companies will likely get any issuance needs completed well in advance of the presidential election this fall.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
