Riskier companies with some $500 billion of debt are being excluded from the Fed pivot party, and they are feeling forgotten, according to BofA Global.
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U.S. companies have enjoyed a record borrowing blitz in January as financial markets rally in anticipation of a Federal Reserve pivot to rate cuts, except for a notable batch of “forgotten” issuers, according to BofA Global.
A record $174.1 billion of investment-grade corporate-bond supply has been issued already this month, according to Informa Global Markets, with another $1.25 billion expected to clear on Friday.
The torrent of supply eclipsed the previous $174.1 billion record set in January 2017, according to Informa. It also has swamped supply expectations from early January.
See: Ford, Toyota ignite up to $60 billion corporate-bond borrowing spree in January as investors brace for lower rates
The Fed’s “hard pivot” to potential cuts “has spurred optimism that the worst of the impact from tight monetary policy impact is now behind us,” Oleg Melentyev, credit strategist at BofA Global, wrote Friday.
But Melentyev said the bottom 30% of companies that rely on the high-yield, or junk-bond, market for funding still “face constrained access, with recent volumes running at 1/4 of the pace of the top 70%.”
He pegged the universe of “forgotten” issuers as owing about $500 billion of high-yield debt, a category that includes loans and bonds. “Even when they do have access, the average coupon here runs north of 11%, or +300bp compared to higher quality.”
Like the stock market’s
SPX
return in January to records set two years ago, investment-grade companies have seen spreads revisit their lowest levels in about two years.
The spread on the ICE BofA Corporate Index, which tracks the investment-grade market, this week dipped below 100 basis points for the first time since January 2022, according to Fed data.
Spreads are the compensation investors earn on bonds above benchmark Treasury rates, to help offset default risks. Lower spreads signal more favorable borrowing conditions for big companies, governments, landlords and even households.
Zero rates return? Not if you ask lenders
The rally since October has been less concrete for riskier companies deemed a higher default risk, especially if the Fed cuts rates by less than some in the market expect.
An index of high-yield corporate debt that includes CCC and lower rated bonds, pegged the spread at 914 basis points above the Treasury rate, up from a roughly two-year low in late December of about 850 basis points.
“We do not think that all $500bn of debt in this group is at risk of restructuring; in fact, most likely only a fraction of it is,” Melentyev said, while suggesting a “quick fix” would be the Fed slashing its policy rate back to zero.
The Fed back in September 2020 expected its pandemic policy of near-zero rates to last through 2023. But that was before a lasting surge in inflation took hold that eventually forced the central bank’s policy rate up to its current 22-year high of 5.25% to 5.5%.