2017 Outlook: Record Start for Debt Issuance

Financial

With interest rates rising in the tail end of 2016, many companies, as well as sovereign governments, are seeking to lock in historically low borrowing costs before it’s too late. The Financial Times reports that 11 companies sold nearly $20 billion of debt in the U.S. as financial markets reopened after the New Year’s holiday, marking the biggest start to a year on record, according to data from Dealogic and FT calculations. Global debt sales surpassed $21 billion for the day.

Companies selling debt included Deere & Co., FedEx Corp., Daimler AG’s U.S. financing arm, and banks including Barclays PLC and Banco Santander S.A. “Issuers are accelerating their funding plans to take advantage of what has been a very strong market backdrop,” Dan Mead, head of Bank of America Merrill Lynch’s U.S. investment grade debt syndicate, told the FT.

Locking in Low Rates
After keeping interest rates in the U.S. at historic low levels, near zero percent, for nearly a decade following the 2008 financial crisis, the Fed has since raised rates twice over the past year. With an American economy that appears to be picking up steam, low levels of headline unemployment, and a Trump presidency that many see as pro-business and inflationary, interest rates are beginning to rise at a quicker pace. As the decades-long bull run in bonds seems about to turn, companies and governments are seeking to lock in still low borrowing costs before it’s too late. (See also: Companies to Issue Less Debt Amidst Rising Rates.)

Indeed, this comes just about two weeks before Mr. Trump takes the oath of office and enacts a series of proposed policies that many believe will strengthen the dollar and spark inflation – both phenomena which increase interest rates. Ever since Trump won the election in early November, bond prices around the world have fallen in value (bond prices vary inversely to interest rates), losing trillions of dollars in value, even as stock markets have rallied. (For more, see: Trump Sparks ‘Great Rotation’ in Bonds, Stocks, Metals.)

If rates increase at this heightened pace, borrowing costs will rise to their highest levels in more than a decade, putting a damper on new bond issuance and perhaps putting a drag on the economy. 2016 happened to be a record year for debt issuance, with more than $3.6 trillion of new debt sold to the market. (See also: Mortgage Hedging May Deepen Treasuries Rout.)

The Bottom Line
Bond issuers are racing to raise funds before interest rates rise, in an effort to lock in historically low rates as a decades-long bull run in bonds seems to be turning. Economic growth coupled with Trump’s presidential win and the Fed’s promise to continue rate hikes have caused rates to rise already, but still remain below their historic averages. As a result, the first trading day of 2017 has already marked a record for new bond issuance of nearly $20 billion, capping off a record 2016 for new debt.