by Byun Seonjin
Published 26 Feb.2024 10:00(KST)
As the global mergers and acquisitions (M&A) market regains momentum, the issuance of high-quality corporate bonds is also increasing. This is largely due to improved funding conditions driven by expectations of a Federal Reserve (Fed) interest rate cut that began spreading from late October last year. Although uncertainty over a soft landing for the U.S. economy has pushed back the possibility of an early rate cut, strong demand suggests that the enthusiasm for corporate bond issuance will continue for the time being, experts say.
On the 25th (local time), Bloomberg cited its own data to report that approximately $50 billion worth of investment-grade bonds were issued in the U.S. over the past two weeks to finance M&A activities. This included bonds issued by AbbVie, Bristol-Myers Squibb, and Cisco Systems. Despite the Fed signaling a delay in the timing of rate cuts amid uncertainty over a soft landing for the U.S. economy, corporate bond demand remained strong, according to assessments.
Another $35 billion worth of investment-grade bonds is expected to be issued in early next month. Bloomberg projected that, buoyed by this trend, at least $276 billion in M&A funding will be raised in the U.S. investment-grade bond market this year.
The resurgence of the corporate bond market is analyzed as a result of well-aligned needs between bond investors and debtors. From the corporate perspective, although borrowing costs are higher compared to the COVID-19 interest rate period, they are clearly on a downward trend compared to the peak at the end of October last year. From the lenders’ standpoint, it is interpreted that they sought to purchase bonds at slightly higher interest rates before rates declined.
The spread on investment-grade bonds continues to narrow. Bloomberg reported, “As bond investors anticipate the Fed will ease the benchmark interest rate at some point later this year, the average spread on high-grade bonds last week was the lowest since November 2021.” The spread refers to the additional interest rate added based on corporate credit ratings over the benchmark rate. A narrowing spread means the market is assessing the risk of investment-grade bonds as lower.
There are expectations that the strong performance of investment-grade bonds will continue this year. The main indicator for this is the flood of M&A activity. Narayanan, co-head of investment-grade credit at Vanguard Group, pointed out, “This is because the most important issue, M&A, is expected to continue.”
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