After a banner 2017, bond sales from corporate and emerging market borrowers have slowed in 2018, sideswiped by trade tensions, volatile Italian politics and the rising cost of credit as central banks tighten policy. Higher-risk bond sales boomed in 2017, thanks to robust economic growth, low global bond yields and booming stock markets. Those no longer apply - the US Federal Reserve seems likely to raise rates a total four times this year and the European Central Bank has called an end to its bond-buying scheme.
Other issues hindering bond issuance include the revival of bank loan markets, the US tax reform reducing companies' need to raise finance, and greater focus on corporate indebtedness - Moody's estimates median debt to EBITDA ratios for investment-grade US firms are now 30 percent above 2007 levels.
Finally, there is concern about the damage trade wars could do to economic growth and company profits. As a result, sales of junk-rated US and euro bonds are down 30 percent and 15 percent respectively from year-ago levels, while investment grade debt issuance from both regions has slipped about a tenth, data from the Institute of International Finance (IIF) shows.
"We were running at the start of the year at decent levels of issuance, then it was disrupted by shenanigans in Italy and now that has calmed down, we have the trade wars. It has not stopped issuance but it's put a bit of dampener on it," said Ed Farley, head of European corporate bonds at PGIM Fixed Income.
Sales of US investment grade and junk-rated debt by June 28 amounted respectively to $540 billion and just under $100 billion, IIF data shows. Euro investment grade issuance was just above $350 billion while high-yield euro sales stood at $51 billion.
While full-year issuance is still likely to trail 2017 levels, second-half sales may get a boost from booming merger and acquisition activity - a raft of firms, from Walmart to Bayer, have tapped markets in recent weeks to fund M&A deals.
"With some of the mega M&A deals, there is no doubt there is a pipeline (of issuance)...most of the M&A will be to a large extent debt-funded," PGIM's Farley said, though he noted new issue premia for some recent bonds had been "punitive".
Bayer for instance had to pay a 25-30 basis-point concession on its recent 5-billion euro four-part offering earlier in June, despite a 21 billion-euro book. And Volkswagen's hybrid deal, also oversubscribed, paid a 40-45 bps premium.
With 10-year US Treasury yields hovering near 3 percent, corporate borrowing costs are on the rise - euro and dollar-denominated average yields are up 30-100 bps for junk as well as high-grade bonds, according to iBOXX indexes.
But hard times may lie ahead for lower-quality debt, with Deutsche Bank noting especially that US junk bonds looked expensive relative to higher-rated peers. Emerging debt faces similar risks. This year's hard currency debt sales amounted to $219 billion as of June 21, according to ThomsonReuters data, slightly down from $232 billion a year ago.
Sovereign sales, boosted by large first-quarter Saudi and Qatari bonds, totalled $97.5 billion but these started petering out from May when US 10-year yields hit 3 percent. Ranko Milic, head of CEEMEA debt capital markets at UBS, said most debut issuers would struggle in current market conditions.
"The interesting single B, the more yieldy transactions, are having to take a back seat until market conditions improve," he said. Average yields on emerging sovereign and corporate bonds have risen around 130 and 90 basis points respectively so far this year. And with EPFR Global data showing $3.4 billion of year-to-date outflows from emerging hard currency bond funds, demand from asset managers for new issuance is also subdued.
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