Companies Funding Acquisitions to Drive Bond Sales This Month

(Bloomberg) -- Companies funding acquisitions will probably help keep U.S. high-grade bond issuance relatively strong this month, even as financial companies are cutting back on borrowing this year.

Deutsche Bank said in December that there were about $140 billion to $145 billion of bonds funding mergers and acquisitions it can see for 2022, more than double the level around the same time a year earlier. At least some of that could come in January. 

Blue-chip corporations are expected to sell $125 billion to $145 billion of bonds this month, according to Bank of America Corp. strategists. That's in line with a typical January in recent years. Some issuers that might have waited until later in the year will look to borrow sooner to get ahead of expected Federal Reserve Rate hikes, they noted. 

“The outlook is a balance between supply being pulled forward into January and lower bank issuance needs next year,” strategists led by Yuri Seliger wrote in December. 

January tends to be the heaviest month for bank bond supply. Large U.S. banks sold bonds of record size last year, helping propel overall high-grade bond supply to more than $1.4 trillion. But financial companies are expected to cut back on borrowing this year, perhaps by about 30%, according to strategists at Barclays, in part because they probably won't need to fund more balance sheet growth.   

The new bond sale calendar may gain steam in the second half of January as companies emerge from earnings-related blackouts, according to Wall Street syndicate desks. 

High-grade supply is set to slow in 2022, but not by much, according to strategists, who say funding levels will remain relatively attractive even if the Federal Reserve begins to hike interest rates.

Investors added $2.22 billion to funds investing in U.S. high-grade bonds for the week ended Dec. 29, after four straight weeks of outflows previous to that.  

High Yield

After enduring a rough November -- one of the worst months for junk since the pandemic began -- junk has been rallying again. Yields are have been steadily declining toward 4%.

Investors' enthusiasm for the debt is evident in flow data: U.S. high-yield bond funds have registered back-to-back weekly periods of cash inflows, according to Refinitiv Lipper data. That sets the stage for companies to resume selling the debt in earnest after December failed to crack $9 billion of new issuance. Wall Street expects about $30 billion of junk-bond sales this month. Junk-bond issuance is expected to fall by about 10% to 15% in 2022.

The known pipeline of U.S. leveraged loan deals is empty heading into the first week of the year. The red-hot pace of sales from 2021 may slow a bit in January, as lenders work through the transition from Libor to SOFR for the benchmark interest rate for loans. 

Read More: Libor Countdown: Much-Maligned Benchmark's Final Days Are Here

©2022 Bloomberg L.P.