The global search for yield has driven tremendous fund flows into all corners of the fixed income market. While our primary focus is on investment grade bonds, this trend has also driven yields lower on non-investment grade bonds which are sometimes referred to as “high-yield” or “junk” bonds. Just as lower interest rates allow residential mortgage holders to refinance and lower the interest expense on their household balance sheet, the same incentives apply for corporate treasurers responsible for their own balance sheets.
The first two weeks of September were marked by a sizable pickup in corporate bond issuance, with over $100 billion of investment-grade debt sold to investors. These bond sales were met by very healthy demand and hardly any price concessions. Highly rated issuers such as Apple, Inc. and The Walt Disney Company led the charge to lock in debt funding at multiyear low interest rates.
On the other end of the quality spectrum, lower-grade issuers also took advantage of the seductive combination of low interest rates and plentiful demand by issuing more debt. The so-called “chicken sandwich wars” of social media fame touched down in the bond market briefly as the parent of Popeye’s Chicken came to market last week to sell $500 million of non-investment grade bonds. Just as their sandwiches had been selling out nationwide, there was such great demand that they upsized the deal to add another $250 million to the total. The entire $750 million, 8-year issue carried a coupon of just 3.875 percent, the lowest in the U.S. high-yield market since 2014, giving new meaning to the term “chicken junk.”
While new bond sales have been strong this month, total issuance is still lower than this time last year and below its peak in 2017. As we have seen in past credit cycles, this window to raise funds can close quickly, so corporate treasurers are opportunistically raising funds at attractive levels while they can instead of when they must.
Access to capital in the credit markets has been unrestrained. While this is a good indicator, financial conditions remain easy and conducive to sustained economic growth. Excesses can sometimes accompany too much of a good thing. We remain vigilant for signs of weakness, but for now the music keeps playing.
Week In Review and Our Takeaways
Retail sales reported this morning were +0.4 percent month-over-month, exceeding expectations and demonstrating that consumer activity remains strong
Core CPI was reported yesterday at +2.4% year-over-year, the strongest annual rate of increase since September of 2008