Financial companies around the globe have sold $2 trillion of bonds in record time this year as European lenders raised money to repay cheap central bank loans and Chinese companies bolstered their balance sheets against mounting economic stress.
(Bloomberg) — Financial companies around the globe have sold $2 trillion of bonds in record time this year as European lenders raised money to repay cheap central bank loans and Chinese companies bolstered their balance sheets against mounting economic stress.
Borrowers surmounted a series of obstacles in coming to market, from the collapse of US regional banks to China’s real estate woes and central banks’ persistent efforts to cool inflation by jacking up interest rates. The hurdles are getting higher: Sentiment worsened in recent weeks as Treasury yields spiked and investors reassessed the threat that slowing growth poses for borrowers.
Issuance by financial firms excluding real estate companies has climbed about 6% this year through Tuesday, according to data compiled by Bloomberg, the fastest time to $2 trillion in the almost quarter century that Bloomberg has tracked the data. Sales of euro-denominated securities are up 52% from the same period last year and make up the largest share globally for the first time since 2014, while dollar offerings fell.
“If the market remains relatively robust we expect banks to keep printing and to look to pre-fund 2024 requirements,” Lloyd Harris, head of fixed income at Premier Miton Investors, said of European borrowers. “We are happy with the creditworthiness of the names in the vast majority of cases.”
Investors so far have been happy to snap up financial bonds, betting that tighter monetary policy would cool the global economy but not tip it into a deep recession. The prospect of a slowdown would lead the Federal Reserve and other central banks to begin cutting rates later this year or early next, the thinking went. In the meantime, after years with benchmark rates at or near zero, bondholders finally were being rewarded with juicy yields.
Even regional banks in the US have been tapping the market as the trauma faded from SVB Financial Group’s collapse in March. Truist Financial Corp., PNC Financial Services Group Inc., US Bancorp and Fifth Third Bancorp have sold bonds since early June.
That warm feeling has faded a bit the past few weeks. The rapid-fire rate hikes by central banks are pressing on corporate and individual borrowers in many countries, causing an increase in defaults and cracks to appear in property sectors. At the same time, investors have come to believe rates will stay higher for longer, with the yield on the 10-year US Treasury note spiking this week to the highest since 2007 at 4.36%, up from 3.75% in mid-July.
Spreads on investment-grade financial bonds in dollars, about half of which are from banks, are on track to widen for the first month in five, a Bloomberg index shows, though they’re still lower than at the start of the year.
Some investors are shying away from smaller US banks, which are in the spotlight again: Moody’s Investors Service this month lowered its credit ratings on 10 of them, while S&P Global Ratings followed suit Monday with downgrades on a slew of lenders.
“They have a lot of exposure to commercial real estate and given our conservative mandate it’s really hard to justify buying them after what happened to SVB,” said Pauline Chrystal, a fund manager at Kapstream Capital in Sydney.
Outside the US, risks for banks also are growing, including an escalation in a property crisis in China and a cost-of-living crisis in the UK. Kapstream Capital also isn’t investing in some Chinese financials due to the property sector’s woes, Chrystal said.
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Chinese firms are the single biggest issuers of financial bonds this year at about $410 billion, of which more than 90% has been in yuan. Large Chinese banks should have the buffers to withstand the fallout from a slump in the property market and knock-on effects for the nation’s shadow banks, S&P said last week.
Investors have to weigh the strength overall in the banking sector versus the potential for financial breakages to cause ripples across markets.
“Our base case is that we are not on the precipice of a financial crisis,” said Gavin Gunning, an S&P analyst. Still, he said, “We are very circumspect with respect to contagion risk. It can often take quite some time to play out and we have seen that through numerous banking crises in the past including the global financial crisis and Asian financial crisis.”
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