Corporations have been issuing debt at a record pace during 2015, with borrowers rushing to beat the beginning of the Fed tightening cycle. In fact, corporate bond issuance levels during March and May of this year are ranked among the top three highest months ever. Share repurchase and strategic merger and acquisition (M&A) activity, fueled by today's easy monetary policy and low long-term interest rates, have also driven heightened levels of corporate borrowing.
On the demand side of the equation, declining appetite for risk on bank and broker/dealer balance sheets, investor fears about the end of the Federal Reserve's zero interest rate policy and less attractive corporate bond yields (resulting from the sharp drop in long-term treasury rates during 2014) have all contributed to the recent widening in investment grade credit spreads and steeper credit curves. Long-term investment grade corporate credit spreads, now in excess of 200 basis points, have moved 50 basis points wider during the past year.
Key Takeaway: Conventional wisdom suggests risk premiums should increase as the Federal Reserve begins to remove monetary policy accommodation. However, long-term investment grade credit spreads may actually be supported by a shift in the supply/demand dynamic that has been created by today's low-rate environment. Higher all-in yields for corporate debt will spur demand from pension plans (particularly those in the process of de-risking) and other institutional investors, while the pace of corporate debt issuance should slow in response to higher borrowing costs.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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