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Companies are rushing to meet their financing needs ahead of this year’s US election, in an effort to get ahead of potential market volatility in the final stages of the presidential race.
Corporate borrowers have issued $606 billion worth of dollar bonds so far this year, up two-fifths from the same period in 2023 and the highest total since at least 1990, according to LSEG data.
Bankers and investors said companies were motivated to borrow thanks to the tightest spreads in recent years, referring to the difference between yields on U.S. corporate debt and those on equivalent government bonds.
But they added that the prospect of close elections pushed companies to press ahead with their plans, rather than risk running into potentially more expensive markets later in the year.
“We are about two months ahead of what I would consider a business-as-usual schedule for investment grade issuance,” said Teddy Hodgson, co-head of Morgan Stanley’s global investment grade debt syndicate.
“I certainly think the election is a driving force for this whole offering.”
US credit spreads have tightened significantly since early January, helped by “technical” factors, including strong demand for new securities from yield-hungry investors, following a pause in debt issuance in 2022 and 2023.
According to Ice BofA Index data, the average spread on investment grade bonds is now just 0.93 percentage points. This is the lowest level since November 2021 and just 0.14 percentage points from the lowest level in 19 years. The average spread on high-yield or “junk” securities is around 3.12 percentage points, around the lowest level since December 2021.
“It’s a really good market out there,” said John McAuley, head of Citi’s North American debt syndicate. “What we’re seeing across the board is higher volumes and tighter spreads – better access for companies.”
McAuley said investors are betting on a much more favorable economic outlook than the “hard landing” many feared last year. Markets are now pricing in expectations that the Federal Reserve will make cuts of 0.75 percentage points this year after aggressively tightening monetary policy to curb inflation.
Companies across a variety of industries have sold bonds this year. The financing activities of several high-end automotive groups have tapped financiers in 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 come to the market, with some companies approaching lenders multiple times as early as the first three months of 2024.
“I think what most companies, particularly frequent issuers, think is, ‘let’s do the majority of our financing 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 get a head start on 2025.”
Some sectors are considered more sensitive than others to the results of the November 5 election, according to some market participants, including healthcare, energy and companies exposed to China. Others noted that businesses will also follow the legislative elections.
John Hines, global head of investment grade debt capital markets at Wells Fargo, pointed out that borrowers “tend to get their annual financings generally before the fourth quarter.”
Still, he said, looking ahead to the election, “coupled with a potential economic slowdown in the second half of the year – if you think about the risks around issuing now, when coupons are reasonable. . . and credit spreads are at historically tight levels – the risk in doing now versus waiting. . . it seems prudent to take the chips off the table now.”
Uncertainty over market conditions has also accelerated fundraising and equity activity, bankers said, with some pointing to an intense program of initial public offerings in the coming months as companies aim to float ahead of the election. Online social forum Reddit and Trump’s social media site successfully went public in March, potentially setting the stage for more companies to follow suit.
Stock traders have started betting on a surge in volatility around the elections.
“My expectation is that this will contribute to significant volatility as we get closer to the actual election day,” said Kristina Hooper, chief global market strategist at Invesco. “But,” she added, “what we’ve seen historically is that elections don’t really matter, along with other long-term geopolitical crises.”
At the same time, borrowing on the convertible bond market also recorded a strong recovery. Sales of converts, debt instruments that can be exchanged for shares if a company’s share price rises to a predetermined level, have risen by more than half this year to $17 billion.
“It’s really a nine-month year from an issuance perspective,” said Richard Duffield, head of convertibles at Citi.
“A lot of issuers are saying, ‘the fourth quarter hasn’t started. . . I just don’t know what the elections will be like, I don’t know what the market will be like: I want to avoid this volatility.”