The US national debt has surpassed $38 trillion, with a significant increase in corporate bond issuance, especially from tech hyperscalers, raising concerns about upward pressure on interest rates and potential market fragility. The growing competition for bond investors and shifting investor composition, from foreign governments to profit-driven entities, could threaten the stability of US financing and increase borrowing costs amid rising deficits and political debates over spending and tariffs.
Investors are increasingly viewing large corporations like Microsoft and Airbus as safer investments than governments due to rising sovereign debt, fiscal backsliding, and erosion of the perceived rule of law, leading to a shift in bond market dynamics where corporate bonds often offer lower yields than government bonds.
Investor demand for corporate bonds has surged, with about $50 billion of bonds sold in the past two weeks to finance acquisitions and spinoffs, marking a steep surge in M&A financing after the slowest year for dealmaking in a decade. US corporate investment-grade bond sales are set to surpass $60 billion for the first time in nearly two years, with some $276 billion of pending M&A activity potentially needing financing.
Nuveen's chief investment officer suggests that investors holding cash should consider buying bonds before the Federal Reserve pivots to rate cuts, as higher yields still present buying opportunities. With assets in money-market funds reaching about $5.96 trillion, there's debate about whether this cash will move into the stock market, but Nuveen advises adding duration in fixed-income portfolios. U.S. investment-grade corporate bonds offer roughly 5% yields, high-yield bonds around 7.6%, and leveraged loans around 9%. Despite the rally in bonds, Nuveen warns of a slowing U.S. economy and advises investors to be nimble and flexible.
Investment grade corporate bond exchange traded funds (ETFs) experienced the second-highest monthly outflows on record in September, with $4.1 billion being withdrawn. The selling was concentrated in US-listed vehicles, although Europe-listed counterparts also suffered outflows of $0.6 billion. However, investors poured $35.1 billion into US equity ETFs, more than three times the amount registered in August. This influx of funds was essentially directed into many of the same companies that issued the investment grade credit being sold. Government bond ETFs, on the other hand, attracted $16.9 billion in inflows. The behavior of fixed income ETF investment is becoming more granular, with differing expectations in different markets.
Almost 1,500 high-grade corporate bonds, including those issued by Apple, Microsoft, Google, Disney, and Comcast, are currently trading at a discount of 50 to 80 cents on the dollar. These bonds offer investors the opportunity to pursue handy returns, as they can be bought at a steep discount and will pay out at par when they mature. With interest rates rising, these discounted bonds have fallen in price, but their yields have moved above 5%. Smaller investors can take advantage of these discounted bonds by buying single-name bonds through brokers or adding them to their portfolios using mutual funds or ETFs.
The sale of Credit Suisse to UBS has triggered a historic write-down of specialty bonds, including CoCos or additional Tier 1 (AT1) bonds, issued by several European banks. Regulators wrote down the value of Credit Suisse's US-dollar denominated CoCo debt to zero, causing turmoil in the $275 billion market for European convertible bank bonds. Barclays, Deutsche Bank, and HSBC's CoCos were among the hardest hit in New York trade. Investors remain on edge about potential additional fallout in the banking system after several midsize US banks failed, and after a big liquidity injection for Credit Suisse from the Swiss central bank last week failed to calm nerves.
