Companies in the United States have been vying for fresh funding in anticipation of the probable rematch between President Joe Biden and his predecessor, Donald Trump, in November. The costs associated with extending the tax-code overhaul that occurred during the Trump administration have become a focal point.
As of this moment, investment-grade corporations have issued approximately $702 billion worth of bonds, as reported by Informa Global Markets. This is the highest amount in five years, excluding the bond market boom of 2020, during which the Federal Reserve purchased corporate debt to stabilise Wall Street and reduced interest rates.
Leslie Falconio, head of taxable fixed-income strategy for the chief investment office of UBS Wealth Management, remarked, “Voices are obviously concerns heading into the election in regards to the deluge of debt issuance observed in 2024, even prior to the midyear mark.”
Falconio stated that it will depend largely on whether the election results in a landslide for one of the major parties or a divided government. He cited the possibility of proposed tariffs and an estimated $6 trillion in taxes as factors that could potentially disrupt operations for U.S. corporations following the election.
Despite the fact that an increasing proportion of voters hold unfavourable opinions of both the Democratic and Republican parties, Wall Street and corporate executives tend to support gridlock, divided government, and the status quo.
‘The Fed said the next move is a cut. We might not know when, but that increases the probability of a soft landing.’
Leslie Falconio, UBS Wealth Management
The circumstances surrounding this election appear to be particularly critical, given that provisions of the Tax Cut and Jobs Act of 2017 that were signed into law by Trump are scheduled to expire by the conclusion of 2025. An additional $4.6 trillion would be required to extend these tax cuts through 2035, according to a Congressional Budget Office estimate released on Wednesday.
Trump has expressed interest in reducing the highest corporate tax rate to 15%, subsequent to its reduction from 35% to 21% during the 2017 tax code overhaul. Biden argued in March that the highest corporate tax rate ought to be increased to 28%.
Insight Investment’s head of fixed income in North America, Brendan Murphy, remarked, “First-quarter issuance was at an all-time high,” adding that corporations appear to be preloading their annual borrowing requirements.
Murphy remarked that issuers may advance their borrowing plans to the third quarter in an effort to evade potential volatility in the fourth quarter that could be attributed to the election.
Benefit from the calm
Open capital markets have also been a significant factor in the borrowing frenzy, as yield-hungry bond purchasers have readily absorbed this year’s deluge of supply.
“A significant portion of that is due to the fact that issuers are seeking to prefund their annual needs and are viewing this as a favourable time to enter the market,” explained Richard Cheng, Nuveen’s head of investment-grade credit.
The financing boom occurs notwithstanding the six-month period of bond market whiplash, which Wall Street has attributed to the uncertainty surrounding the timing and extent of interest-rate reductions communicated by Federal Reserve chair Jerome Powell.
According to Dow Jones Market Data, the benchmark 10-year Treasury yield BX:TMUBMUSD10Y was near 4.5% on Wednesday, having touched 5% in October, but was still significantly above its approximately 3.9% February low.
The recent decline in yields has been ascribed to Powell’s reassurance to the market last week that a rate cut, rather than a hike, was the probable course of action for the Federal Reserve.
Overall, investment-grade bond yields have remained around 5.5% due to elevated Treasury yields. However, over the past year, investors have received less additional compensation, or “spread,” on corporate bonds due to the influx of buyers into new issuance.
The ICE BofA US Corporate Index was most recently estimated at a spread of merely 88 basis points, which is the narrowest spread between Treasury securities and corporate debt since November 2021, prior to the Federal Reserve’s rate hikes. Cheng stated, “From a spread perspective, valuations are quite stretched here.” “However, considering yield, it does appear to be quite attractive.”
Falconio of UBS projects that the annual gross issuance of investment-grade corporate bonds will amount to approximately $1.3 trillion. “A cut is the next move, according to the Fed,” she stated. “While the exact moment remains uncertain, such circumstances heighten the likelihood of a soft landing.”
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