HG monthly: Borrowing accelerates again as yield curve shift triggers alarms

U.S. high-grade issuance volume topped $100 billion in February, for just the third time on record for the month, further bolstering the unprecedented amount of borrowing in the pandemic era, according to LCD.

High-profile issuers pounced on low borrowing costs at the start of the month and then a harrowing lurch higher in underlying Treasury yields over the balance of February spurred a broader sense of urgency to lock in rates, a trend that has precipitated torrential issuance volume in early March as well.

High-grade issuance — when excluding sovereign/agency/supranational (SAS) and hybrid debt/equity offerings from the count — totaled $106.7 billion for February, according to LCD. That marks a material increase from the roughly $82.3 billion priced in February last year, reflecting a sharp downturn in issuance volume over the back half of that month, as COVID-19 concerns began to creep into the credit markets. Issuance for the first two months of 2021 ran 9.4% ahead of last year's pre-pandemic pace.

The 2021 total falls just shy of the record for a February period, or the $109 billion tally in 2015. It bumps the $103.4 billion total for February 2016 into third place.

The strong issuance came against the backdrop of an underlying yield curve in flux. Quickening vaccine deliveries in recent weeks have stoked economic recovery hopes, while simultaneously heightening the risk that the lid will finally come off long-contained inflation, the Achilles heel of bonds. The differential between 2- and 30-year yields swelled from 173 basis points on Feb. 1 to 213 bps on Feb. 26. That yield slope has steepened from 152 bps at the start of the year, and it was just 109 bps at the start of August 2020, when scores of top-tier borrowers swarmed the primary market to lock in their lowest-ever rates against that flatter curve.

The opening sessions of February saw a profusion of blockbuster, curve-spanning bond placements, including from Apple Inc. ($14 billion), Boeing Co. ($9.825 billion), Altria Group Inc. ($5.5 billion) and Alibaba Group Holding Ltd. ($5 billion).

For serial issuers in the pandemic era, costs in February remained well below the high coupons demanded by investors in the early weeks of the crisis last March, but were generally up palatable amounts from their best pricing executions over the subsequent quarters. The 2.65% coupon for Apple's new-issuer 30-year bond was above the 2.40% coupon it printed on Aug. 13 last year (its lowest ever since it first entered the bond markets in 2013), but in line with a 2.65% 30-year bond it priced last May, in what was, at the time, its cheapest-ever long-term funding costs.

Squeaky-tight spread levels have helped limit the rise in absolute costs, indicating resilient risk tolerance up and down the credit-quality spectrum as recovery hopes temper the buffets from rate volatility. Apple's 30-year print last month came at a T+82 spread at pricing, substantially through the T+100 spread it paid for that lower-coupon 2050 bond it priced in August 2020 and the T+145 spread for the 30-year bonds it priced in May 2020.

Showcasing the firm spread progressions, the spread for the new 30-year Apple bonds has held at the T+82 pricing level on the secondary market, despite the dollar price for the bonds plunging roughly 10 percentage points over the last month to reflect the sharp rise in Treasury 30-year bond yields. The Apple bonds on March 5 traded at yields in the 3.15% area, or 50 bps above the coupon rate, trade data show.

Overall, the average yield at issuance for all high-grade pricings in February moved up to 2.10%, from the pandemic-era low at 1.71% in January, and averages near 1.80% over the last two months of 2020.

Despite the higher absolute yield levels, roughly half of the dollar volume for February explicitly backed refinancing efforts, including a large proportion of proceeds earmarked to term out bond maturities due through 2023. Notably, the February new-issue yield average held well below the 2.70% level in February 2020.

As well, issuers continue to lock in some of the lowest-ever costs for shorter-dated paper. Nippon Telegraph and Telephone Corp.'s NTT Finance Corp. subsidiary on Feb. 24 priced $8 billion of notes in five parts, backing the refinancing of a heavy debt load that it incurred to complete the parent's acquisition of listed subsidiary NTT Docomo in November 2020.

That single-A offering included 0.373% 2-year notes, a rate that ranks among the lowest for 2-year corporate paper. The only five lower-rate pricings have all come since August 2020. Caterpillar Financial Services Corp. on Feb. 22 placed 0.25% 2-year notes at a 0.293% reoffer yield, holding the low-cost title for less than two weeks, until peer John Deere Capital Corp. on March 1 reset the bar lower still with a 0.25% 2-year issue priced at 0.269%.

The threat of higher rates down the road has issuers scrambling to take advantage of the still-compelling funding opportunities, including a mounting number of deals backing M&A plays. As the earnings-reporting season wound down last month, issuance surged to $36 billion over the last week of February, and exploded to more than $63 billion over the first week of March, including a $10 billion print from Siemens AG backing its $16.4 billion acquisition of global radiation therapy concern Varian Medical Systems Inc.

For reference, only six other calendar-week totals have been higher than the roughly $63 billion priced for the week to March 5 (under LCD criteria that excludes SAS and hybrid deals), five of which were recorded since the onset of the pandemic. Since the Federal Reserve erected liquidity backstops in March 2020 to support the pandemic-crippled corporate markets, high-grade issuance has totaled more than $1.73 trillion through March 5, 2021, 64% more than issuers placed over all of 2019 and nearly 40% more than the prior calendar-year peak of $1.24 trillion in 2017.