Corporate borrowers bring forward financing plans to avoid uncertainty of Biden-Trump rematch in November
Companies are rushing to meet their financing needs before the US election this year, in a bid to get ahead of potential market volatility in the final stages of the presidential race.
Corporate borrowers have issued $606bn worth of dollar bonds so far this year, according to LSEG data, up by two-fifths compared with the same period in 2023 and the highest total since at least 1990.
Bankers and investors said companies were being motivated to borrow by the lowest spreads in years — referring to the difference between US corporate debt yields and those of equivalent government bonds.
But they added that the prospect of a close election had pushed companies to bring forward their plans, rather than risk running into potentially more expensive markets later in the year.
“We’re running circa two months ahead of what I would consider a normal type schedule for investment-grade issuance,” said Teddy Hodgson, co-head of Morgan Stanley’s global investment-grade debt syndicate. “I certainly think the election is a driving force for all of this supply.”
The rush to corporate bond issues mirrors moves by traders betting on futures contracts tied to the value of the Vix index — the “fear gauge” that measures expectations of near-term swings in the S&P 500 benchmark.
Though unable to trade the Vix directly, investors can purchase futures contracts at prices reflecting where they expect the Vix to be trading at different points in the months ahead. Analysts say traders are pricing in a rise in market stress months earlier than normal ahead of an election. The spreads on bond yields are often an indication of risk.
US credit spreads have tightened significantly since early January, helped by “technical” forces including strong demand for new paper among yield-hungry investors, after a lull in debt issuance in 2022 and 2023.
The average investment-grade bond spread now sits at just 0.93 percentage points, according to Ice BofA index data. That is around its tightest level since November 2021 and just 0.14 percentage points from the narrowest level in 19 years. The average high-yield or “junk” spread is hovering at 3.12 percentage points, around its narrowest level since December 2021.
“It is a really good market out there,” said John McAuley, Citi’s head of debt capital markets, North America. “What we’re seeing across the board is higher volumes and tighter spreads — better access for companies.”
McAuley said investors were betting on a much more benign economic outlook than the “hard landing” feared by many last year. Markets are now pricing in expectations that the Federal Reserve will make 0.75 percentage points of cuts this year after tightening monetary policy aggressively to curb inflation.
Companies from a range of industries have sold bonds this year. The financing businesses of various high-grade car groups have tapped lenders across multiple deals, including Ford and Toyota. Several banks, including Morgan Stanley, JPMorgan and Standard Chartered, have also issued debt in the first quarter.
Construction groups including Caterpillar’s financial services arm have come to the market too, with some companies tapping lenders multiple times already in the first three months of 2024.
“I think what most companies are thinking — particularly frequent issuers — is ‘let’s get the majority of our funding done in the first half of 2024’,” said Morgan Stanley’s Hodgson. “[Then] if we go through the election, and the market response is positive for whatever reason, we’ll use the back end of the year to get a head start on 2025.”
Certain sectors are deemed more sensitive to the November 5 election’s results than others, according to some market participants, including healthcare, energy and companies exposed to China. Others noted that businesses will also be watching legislative elections.
John Hines, global head of investment-grade debt capital markets at Wells Fargo, pointed out that borrowers did “tend to get their annual financings done generally before the fourth quarter”.
Still, he said, looking ahead to the election, “combined with a potential economic slowdown in the second half of the year — when you think about those risks relative to issuing now, when coupons are reasonable . . . and credit spreads are at historically tight levels, the risk in executing now versus waiting . . . it seems prudent to take the chips off the table now.”
Uncertainty over market conditions has also accelerated equity fundraisings and activity, bankers said, with some pointing to busy initial public offering pipelines over the next few months as companies aim to float ahead of the election. Online social forum Reddit and Donald Trump’s own social media site had successful public listings in March, potentially setting the stage for more companies to follow suit.
Stock traders have started placing bets on an upsurge of volatility around the election.
“My expectation is that it will contribute to significant volatility when we get near the actual day of the election,” said Kristina Hooper, chief global market strategist at Invesco. “But what we’ve seen historically is that elections really don’t matter — along with other geopolitical crises over the longer term.”
Borrowing in the convertible bond market has also picked up sharply. Sales of converts, debt instruments that can be exchanged for shares if a company’s stock price rises to a pre-agreed level, have jumped by more than half this year to $17bn.
“It’s really a nine-month year from an issuance perspective,” said Richard Duffield, head of equity-linked capital markets at Citi. “A lot of issuers are saying: ‘the fourth quarter is a non-starter . . . I just don’t know what the election is going to look like, I don’t know what the market’s going to look like — I want to avoid that volatility.’”
This story has been amended to clarify the job titles of John McAuley and Richard Duffield at Citi.
