What's going on with investment grade corporate bonds? What's going on with investment grade corporate bonds? http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\building-interior-glass-steel-small.jpg February 5 2024 February 6 2024

What's going on with IG corporate bonds?

New investment-grade corporate bond issuance is pouring into the market.

Published February 6 2024
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January just witnessed a record amount of new investment-grade (IG) corporate bond issuance. The $194 billion was nearly 50% higher than the monthly average over the last four years. This comes on the heels of $1.2 trillion in each of the last two years and against the backdrop of the $7.7 trillion market value of the Bloomberg Credit Index. February is forecast to see at least $150 billion more, again well above historical averages for the month. 

Why this sudden rush to issue debt? Of course, companies have an ongoing need to refinance maturing debt. But a large base of buyers hungry for yield has emerged. Markets perceive the Federal Reserve will begin cutting rates in the first half of this year, which would lead to a drop in market yields. The Bloomberg Credit Index reached 5.00% at year-end 2023, at a discounted price of $93.70—well below its longer-term average. As an investor, why not lock in these high yields and contractual coupon rates now, then pick up the price appreciation as they decline?

The economic backdrop measurably improved over the course of 2023. Market forecasters had almost uniformly predicted a recession, brought on by job losses, falling consumer confidence and spending, and a general contraction in economic activity. Not only has that not happened, but growth actually picked up in the third quarter, to an annualized rate of 4.9%, before cooling to a 3.3% rate in the fourth. The Atlanta Fed’s GDPNow, a real-time model, is running above 4% in the first quarter of 2024. Job gains have increased over the last two months, the unemployment rate has remained below 4% for the last two years and consumer confidence has steadily improved. 

As these prospects have improved, investment-grade credit spreads have tightened to levels last seen before the Fed started raising rates in March 2022. Credit fundamentals also have improved. Rating upgrades are outpacing downgrades, and consensus is forecasting revenues in 2024 to be 5% higher and earnings-per-share gains to top 11%. With the Fed’s December shift from combatting inflation to preventing recession—still the plan despite some recent pushback by officials—it seems likely credit spreads will be range-bound around these levels. 

While we at Federated Hermes still recommend a slight underweight to IG credit allocations, we are looking for somewhat cheaper valuations to add some more. Perhaps the expected avalanche of new issuance in February will provide the opportunity.

Tags Fixed Income . Interest Rates . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

The Bloomberg US Credit Index is a subset of the US Government/Credit Index and US Aggregate Index that measures the investment-grade, US dollar-denominated, fixed-rate, taxable corporate and government-related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes non-US agencies, sovereigns, supranationals and local authorities. Indexes are unmanaged; investments cannot be made in an index.

Bond credit ratings measure the risk that a security will default. Credit ratings of A or better are considered to be high credit quality; credit ratings of BBB are good credit quality and the lowest category of investment grade; credit ratings of BB and below are lower-rated securities; and credit ratings of CCC or below have high default risk.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

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