- Zero In: Investors, worldwide, are taking a closer look at corporate bonds.
- Ramp Up: Demand for U.S. corporate bonds, in particular, driven by strong fundamentals, current environment.
- Set Record: Bond issuance reaches all-time high in 2013: $999.3 billion.
For fixed income investors, the extremely low interest rate environment of the past few years has left them searching for higher yields. As they did in 2013, Northern Trust Asset Management believes investors worldwide will look to invest in U.S. corporate bonds.
U.S. corporations are large and well-diversified businesses — and many have a global footprint. Recently, demand for corporate debt continues to be strong, driven by positive company fundamentals and low yields in other fixed income asset classes.
It’s also worth noting that U.S. corporations are in excellent condition, having used the low interest rate environment of the past few years to refinance their balance sheets cheaply. They’ve been reluctant to invest in their businesses, despite access to cheap money and willing investors in the capital markets. The lack of desire to invest is perhaps most clearly seen in the record amount of cash sitting on their balance sheets. All of these factors, combined, lead Northern Trust’s fixed income team to believe investors will continue to find corporate bonds attractive.
“We would expect the demand to be strong for corporate issuance in 2014,” said Northern Trust Product Specialist Kristen Lewis. “But we don’t expect the supply to be as strong as last year.”
In 2013, U.S. corporations took advantage of the low interest rate environment and voracious investor demand and issued more debt than in any other year in history. The chart below shows 2013 issuance climbing to an all-time high of $999.3 billion, eclipsing 2012’s figure of $973.1 billion.
Investment-grade and high-yield corporate issuers continued to enjoy robust demand throughout the fourth quarter, with new issuance concessions low and credit spreads tightening throughout (see chart below). Relative to other fixed income asset classes, investors continue to find corporate debt attractive due to positive company fundamentals and their yield advantage over U.S. Treasuries.
“The team believes issuers with lower credit ratings will outperform higher quality firms in 2014,” Lewis said. “Credit spreads for AAA to single A issuers are tight at the current time and provide only limited opportunity to generate alpha. Firms rated BBB down to CCC have a wider dispersion in their spreads and allow our fundamental approach more opportunities.”
“In the low interest rate environment we’ve experienced, we’re seeing investors choose a significant overweight to corporate debt, and especially the debt of U.S. financial companies,” Lewis said. “The fundamentals of U.S. financial companies continue to look more attractive than those of industrial firms.”
Indeed, financial companies outperformed industrial firms throughout 2013.
Financial firms continue to deleverage their balance sheets, while nonfinancial corporate debt has been rising. Financial firms are also subject to significantly more regulation now than they were prior to the credit crisis. The increased regulation has caused these firms to increase their capital, maintain more liquid balance sheets and curtail some of their riskier businesses.