Market swings making it harder for companies to borrow cash

U.S. investment-grade issuance slipped 34% from September, according to Dealogic

Companies are finding it harder to issue new debt, as the volatility battering global stocks adds to existing concerns in credit markets.

Corporate bond prices have declined throughout the year and October’s global market rout triggered massive outflows from credit funds.

U.S. investment-grade issuance slipped 34% from September, according to data-provider Dealogic, while high-yield issuance was down 50% from October last year. Even before October’s selloff, American companies had been raising less money. By the end of September, total investment-grade issuance in 2018 was down 12% compared with the first nine months of last year, and high-yield issuance had fallen by almost a third.

The value of new investmentgrade corporate bonds in Europe was 75% lower in October than in September and down 40% from October 2017. High-yield issuance slumped 82% from a year ago.

Investors pulled $3.1 billion (U.S.) from investment-grade corporate-bond funds last week, according to Bank of America Merrill Lynch, bringing outflows over the past two months to a record $25.2 billion. High-yield funds have also seen big withdrawals. By contrast, equity funds drew in $8.5 billion last week despite stocks’ fall.

“From a fixed-income perspective 2018 is rapidly turning into a year best forgotten,” said David Oliphant, an executive director at Columbia Threadneedle Investments. “We’re getting to the end of a very protracted and mature credit cycle.”

Bond prices have drifted lower through much of the year, after a years’ long rally. Last month some of the concerns hitting credit, such as slowing global growth and fears of a trade war, caught up with equity markets, pushing major U.S. indexes near or into correction territory.

Credit markets had also benefited from a decade of monetary stimulus that is now being withdrawn. The European Central Bank is set to end its bond-buying program and the Federal Reserve is raising interest rates and winding down its balance sheet.

The selling in bonds was less dramatic than in stocks over October. But on Tuesday, the spread between yields on investment-grade bonds and those on safer government debt had still reached 1.51 percentage points in the U.S. and 1.46 points in Europe, according to IHS Markit’s iBoxx indexes. That is up from postcrisis lows of 1.08 and 0.82 points reached in early February.

High-yield bonds, until recently a rare bright spot in fixed income, have declined particularly sharply in recent weeks.

The spread on the Bloomberg Barclays U.S. Corporate HighYield index has shot up 0.62 percentage point since Sept. 20, the day the S&P 500 closed at a record high.

In this environment, bankers say they have advised clients to hold back on issuing new debt until markets calm down.

To be sure, corporate bonds still have much lower spreads than they did during the sell-off of early 2016, let alone the global financial crisis. Bankers also say refinancing risk for the corporate world is relatively low since many companies locked in funding early this year, anticipating that markets would move against issuers during 2018.

But some investors believe that corporate spreads will continue to head higher, even if volatility falls in equity markets. The same factors that have pressured this market are still there, including slowing global growth, less monetary stimulus and concerns over trade.

“Credit is entering a new regime and transitions tend to be difficult,” said Wolfgang Bauer, co-manager of the Absolute Return Bond Fund at Londonbased M&G.