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Companies are rushing to meet their financing needs before the US elections this year, in an attempt to anticipate potential market volatility in the final stages of the presidential race.
Corporate borrowers have issued $606 billion in dollar bonds so far this year, according to data from LSEG, up 20% from the same period in 2023, the highest total since at least 1990.
Bankers and investors said companies were motivated to borrow at the lowest spreads in years — a reference 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 prompted companies to submit their plans, rather than risk entering potentially more expensive markets later in the year.
“We are about two months ahead of what I consider to be a normal timeline for issuing investment grade debt,” said Teddy Hodgson, co-head of Morgan Stanley's global investment grade debt group.
“I definitely think the election is the driving force of this whole show.”
US credit spreads have narrowed significantly since early January, supported by “technical” forces including strong demand for new paper among yield-hungry investors, after a slump in debt issuance in 2022 and 2023.
The average spread for investment-grade bonds is now just 0.93 percentage points, according to data from Ice BofA Index Data. This is close to the lowest level since November 2021, and just 0.14 percentage points away from the lowest level in 19 years. The average high or “junk” yield spread is hovering at 3.12 percentage points, around the lowest level since December 2021.
“It's a really good market,” said John McCauley, head of the North American debt group at Citibank. “What we're seeing across the board is higher volumes and lower margins — better access for businesses.”
McCauley said investors are betting on a much more moderate economic outlook than the “hard landing” that many feared last year. Markets are now setting their expectations for the Fed to make cuts of 0.75 percentage points this year after aggressively tightening monetary policy to curb inflation.
Companies from a range of industries have sold bonds this year. Finance companies of various high-end car groups have tapped lenders across multiple 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 tapping lenders several times already in the first three months of 2024.
“I think what most companies — especially frequent issuers — are thinking is: Let's get the majority of our financing done in the first half of 2024,” Morgan Stanley's Hodgson said. “[Then] If we get through the election, and the market response is positive for whatever reason, we will use the end of the year to start in 2025.
Some sectors are more sensitive to the results of the Nov. 5 election than others, according to some market participants, including health care, energy and companies with exposure to China. Others noted that companies will also monitor the legislative elections.
Borrowers “generally tend to complete their annual financings before the fourth quarter,” noted John Hynes, global head of investment grade capital markets at Wells Fargo.
However, he said, looking ahead to the election, “combined with the potential economic slowdown in the second half of the year — when you think about those issuance risks now, when coupons are reasonable… and credit spreads are at historically tight levels.” – Risk in executing now versus waiting… It seems wise to take the chips off the table now.
Uncertainty over market conditions has also accelerated fundraising and equity activity, with some pointing to crowded IPO lines over the next few months as companies aim to go public before the election, bankers said. Online social forum Reddit and Trump's social networking site had successful public listings in March, paving the way for more companies to follow suit.
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Stock traders have begun betting on rising volatility around the election.
“My expectation is that it will contribute to significant volatility as we get closer to the actual election day,” said Christina Huber, chief global market strategist at Invesco. “But what we've seen historically is that elections don't really matter — along with other geopolitical crises in the long term,” she added.
At the same time, borrowing in the convertible bond market rose sharply. Sales of convertibles, debt instruments that can be exchanged for shares if a company's share price rises to a pre-agreed level, jumped by more than half this year to $17 billion.
“It's actually a nine-month year from a release perspective,” said Richard Duffield, City's head of convertibles.
“A lot of exporters say: ‘The fourth quarter was not a good start.’ … I 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.”
