Economic Boom Outlook Boosts Popularity of US Speculative-Grade Corporate Bonds

Interest Rate Cuts Also Play a Role

The probability of a U.S. recession has decreased, leading to continued strong demand for speculative-grade bonds (junk bonds).

According to PitchBook LCD data on the 21st (local time), the issuance volume of speculative-grade bonds by U.S. companies last month totaled $109.7 billion. This is the third-largest monthly total since 2005. Speculative-grade corporate bonds refer to bonds issued by companies with a financial structure that carries a risk of default.

According to Bloomberg data, the interest rate spread between U.S. speculative-grade corporate bonds and major U.S. government bonds stood at 2.85 percentage points as of last week. This is only slightly higher than the lowest level recorded in 2021, which was the lowest in 14 years.

A narrow interest rate spread between the two bonds means that investors perceive a lower risk that low-credit companies issuing the bonds will fail to repay their debts. The Wall Street Journal (WSJ) explained, "Two months of labor market data that dispelled summer recession concerns had a significant impact on this optimism," adding, "As the probability of a recession receded, an atmosphere formed where even risky companies can raise funds through bond issuance when needed."

Additionally, the expectation of reduced borrowing costs following the Federal Reserve's (Fed) interest rate cut last month?the first in four and a half years?has also contributed to the popularity of speculative-grade bonds. Earlier, on the 18th of last month, the Fed held a Federal Open Market Committee (FOMC) meeting and lowered the upper bound of the benchmark interest rate from 5.5% to 5.0%.

Notably, recent bond issuances by low-credit companies are attracting attention because they signify more than just refinancing existing loans. According to PitchBook LCD, about $22.1 billion of junk-rated bonds issued last month were used for dividend payments. This is the highest monthly total since 2000.

Regarding the boom in speculative-grade bonds, David Shipman of Aquila Investment Management analyzed, "As the presidential election approaches, liquidity conditions could worsen, so companies seem to want to avoid being excluded from the market."

Michael Anderson, head of U.S. credit strategy at Citigroup, said, "Credit is a game of trust, and current investors are showing a lot of trust in speculative-grade bonds."

This content was produced with the assistance of AI translation services.