US bond issuance to slow after fast kickoff

US corporate bond market issuance is projected to slow this week from a hectic start to the year after economic data sent mixed signals on Friday but tempered expectations of an interest rate cut in March.

The first week of 2024 saw nearly $59bn in high-grade bond issuance, beating forecasts of $50bn-$55bn.

The rush was led by toprated companies aiming to take advantage of relatively lower borrowing costs due to a tightening of credit spreads — the premium charged over treasuries — and decline in treasury yields at the end of 2023.

They were met with strong demand as investors aimed to lock in yields that may not be available if the Federal Reserve (Fed) starts to cut US interest rates later in 2024.

But economic data releases on Friday sent mixed signals and led to sharp moves in treasury yields. Yields hit three-week highs early in the trading session and then nosedived, taking the 10-year back below 4%.

The volatility in yields and release of bank earnings could limit supply for new bonds.

The week ahead “is going to be pretty light, pretty moderate in comparison”, said Guy Lebas, chief fixed-income strategist at asset manager Janney Capital Management.

Bond syndicate desks expect $35bn on average in issuance this week, according to Informa Global Markets. As such, these desks expect a steady flow of new bond issuance in January as borrowing costs were still lower than the fourth quarter of 2023.

Investment-grade index yields averaged 5.3% on January 4 compared with 5.88% in the fourth quarter, according to ICE BAML data.

Dan Krieter, director of US investment-grade strategy at BMO, noted companies will save nearly 85 basis points now compared with October and November, when yields averaged 6.13%.

Investors are still attracted to high-grade bonds, as seen in $5bn that flowed into related funds and exchange traded funds for the week to January 3, according to a Bank of America Global research note. That was higher than $3.15bn the prior week and the biggest weekly inflow since July.