Rise in interest rates will impact corporate borrowing programs
Source: The Wall Street Journal
The prospect of a Federal Reserve rate rise has investors in the U.S. credit markets less willing to make long-term bets.
That may sound counter-intuitive, given that two exchange-traded funds that track long-term corporate bonds are both up 14% this year, making them some of the year’s star performers.
But the decreasing appetite for corporate debt with maturities of more than 10 years is showing up in sales figures, where companies are selling fewer long bonds. So far this year, high-grade U.S. companies, excluding financial institutions, have sold 25%, or $136.5 billion, of their debt with a maturity of more than 10 years, according to Dealogic data. That’s down from 30% during the same period a year earlier.
After four straight years where that figure had been flat or rising during the year-to-date period, the drop may be a sign of shifting buyer appetites.
“This year, there was certainly anticipation that there would be a rate hike,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott. “That’s causing a lot of investors to demand less long-term paper.”
In a rising rate environment, many types of debt look less attractive. But duration-heavy long-term bonds will see their prices fall more than short-term bonds for each rise in interest rates. Such eroding value complicates the pitch for buying long-term bonds.
Investor expectations about a rate rise have ebbed and flowed through the year, but this is the first year where investors have widely expected the Fed to move for much of the year. Back in the beginning of the year, many anticipated four rate increases. Now investors are betting that there will be at least one hike before the end of the year, according to CME data based on the fed funds futures market.
Many companies, of course, still are finding enough demand to sell the longest debt. When Apple came to the market late last month with a $7 billion five-part offering, a full $2 billion of that had a 30-year maturity.
The longest-term debt still provides more yield too. In the $9.1 trillion global market for high-grade bonds with maturities of 15 or more years, U.S. corporates make up 17% of the market value, but pay 40% of the yield income, according to Bank of America Merrill Lynch.
Still, the sales of long-term high-grade debt increasingly reflect a preference for the largest issuers. Already this year, there have been eight bond deals that are $10 billion or larger in size, according to Janney. While big high-grade companies like Apple can get deals done with all types of maturities, smaller companies may be increasingly challenged.
That’s reflected in the broader high-grade corporate debt market. The value of sales this year appears to be barely off its record high, largely holding up to due in part to the huge deals. But the number of deals, which factor large and small sales equally, at 348 so far this year, is on pace to be the least since 1996, according to Dealogic.
If Fed rate hikes become more common, investors will only get pickier about what they own.