US corporate bond trades set to ebb this year amid rising rates and volatility – BofA

U.S. dollar banknotes are displayed in this illustration taken February 14, 2022. REUTERS/Dado Ruvic

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NEW YORK, May 17 (Reuters) – Sales of U.S. bonds by blue chip issuers are expected to fall around 10% this year as borrowers face higher rates and market volatility, it said on Tuesday. a BofA official (BAC.N).

Corporate bonds had a difficult start to the year due to investor concerns about the impact of tighter monetary policies on corporate earnings and borrowing costs, as well as the possibility of a sharp economic slowdown as the Federal Reserve attempts to curb relentless inflation.

Credit spreads – the interest rate premium demanded by investors to hold corporate debt over safer US Treasuries – have widened, but not dramatically.

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The ICE BofA U.S. Corporate Index (.MERC0A0), which tracks investment-grade dollar-denominated corporate debt, stood at 149 basis points on Monday, about 50 points higher year-to-date and three basis points lower than the nearly two-year high. touched in March.

In the first few months of this year, issuance of investment-grade U.S. corporate bonds totaled around $470 billion, matching levels seen in the same period a year earlier, as borrowers concerned about the rate hikes sought to secure still favorable funding conditions, said Dan Mead, head of investment grade syndicate at BofA.

But that pace has slowed recently as markets have become increasingly volatile on concerns about monetary policy and economic growth.

“We remain consistent with our expectation that overall supply will be down around 10% to 12% this year compared to last year, as we expect the second half of this year to be calmer, certainly calmer than the second half of the year that we’ve seen in 2020 and 2021,” Mead said.

Last year, US investment grade bond issuance was around $1.5 trillion, according to Refinitiv data.

As global central banks rapidly withdraw stimulus, liquidity in financial markets has deteriorated this year as traders face wild intraday swings and shrinking trade sizes. Read more

“The big theme in our market, like other asset classes, has been volatility, both in the rates market and volatility in the credit spread market,” Mead said, adding that this has contributed to greater caution on the part of investors.

“They are still very committed to participation, but perhaps on a smaller scale in terms of deal size, and certainly have more price discipline, needing to see larger concessions to participate in new shows,” he added.

US credit markets rallied after the Federal Reserve began raising rates in March, but that was short-lived and lower-rated corporate bonds have since hit new lows. Read more

The Fed is expected to raise interest rates by 50 basis points in June and July and expects to start shrinking its balance sheet in June at a faster pace than in its previous exercise of “quantitative tightening”.

“These factors – rate hikes, QT – will start to affect the real economy,” said Mark Howard, managing director of BNP Paribas in New York.

“What’s remarkable about what we’ve seen in the markets over the past week is a shift from fear of higher rates to greater fear of slower growth,” he said. he said, “and that’s contributing to some of the short-term anxiety in credit. … Growth concerns are hurting spreads now.”

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Reporting by Davide Barbuscia; Editing by Leslie Adler

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