Rapid switch in US rate-hike view fuels bond-issuance surge
LONDON (Reuters) – The recent surge in US rate-hike expectations has triggered a wave of activity in global debt markets, as companies and governments scramble to raise billions of dollars of funds before the Fed raises borrowing costs.
By some measures, record amounts were raised.
The Federal Reserve was almost certain to raise rates on Wednesday for only the third time since 2006. Money markets attached a 94% probability to a quarter-percentage-point hike – as good as guaranteed in financial markets – while all 102 economists polled by Reuters expected it.
But this level of certainty has only been reached in the last two weeks after speeches from senior Fed officials including Chairwoman Janet Yellen put a March move firmly on the table.
As recently as the end of February, money markets put around a one-in-three chance on the Fed raising rates this month.
Last week saw the biggest amount of high-yield, or “junk,” bond issuance in the United States for two years, as companies with a low credit rating scrambled to raise $15.8 billion in the week to March 10. That is three times the weekly average so far this year and around 30% of the year-to-date total.
Assets such as equities, emerging-market and corporate bonds – especially high-yield debt – are most sensitive to rising US interest rates.
Curiously, however, the surge in US high-yield issuance coincided with Wall Street’s biggest weekly fall of the year, with the S&P 500 breaking a run of six consecutive weekly gains to fall 0.44%.
This suggests stocks may be topping out after hitting a string of record highs in recent weeks. Junk bonds may not be far behind.
“Junk bonds have rallied of late, but a move to aggressively tighten US monetary policy could cause chaos in this sector,” said Neil Wilson, a senior strategist at ETX Capital in London.
A similar pattern may be playing out in emerging markets, where companies and governments also have rushed to borrow before borrowing costs goes up.
Bond sales by emerging-market companies alone topped $75b. as of March 8, according to J.P. Morgan. February sales totaled $33b., compared with a monthly average of $20b. in recent years, the bank noted.
Sovereign emerging-market issuance so far this year is just under $40b., already half of J.P. Morgan’s full-year sovereign issuance forecast for 2017.
One of the reasons behind investors’ positive view of emerging markets so far this year has been stable US rates and dollar borrowing costs. But that is starting to change.
Two- and five-year US bond yields are the highest since 2009 and 20011, respectively, as traders price in three Fed rate hikes this year. Some see even more.
“Commodity prices have dipped lower, and global growth is unlikely to continue accelerating through [the second quarter],” Jane Wei, an emerging-market strategist at Goldman Sachs wrote in a note on Wednesday. “Additionally, our expectation for the Fed leans slightly more hawkish relative to the market.”