The best start to a year for bond returns is helping fuel an unprecedented debt-sale bonanza by governments and companies around the world of more than half a trillion dollars.
From European banks to Asian corporates and developing-nation sovereigns, virtually every corner of the new issue market is booming, thanks in part to a rally that’s seen global bonds of all stripes surge 4.1% to start the year, the best performance in data stretching back to 1999.
Borrowers looking to raise fresh financing after getting turned away for much of 2022 are suddenly encountering investors with a seemingly endless appetite for debt amid signs inflation is cooling and central banks will call a halt to the harshest monetary tightening in a generation. For many, fixed-income assets are looking increasingly attractive after last year’s historic rout drove yields to the highest since 2008, especially as the prospect of a slowing global economy offers the potential for further gains.
“The run-up in bond prices has legs in our view, particularly when it comes to the investment-grade markets,” said Omar Slim, co-head of Asia ex-Japan fixed income at PineBridge Investments. “Corporate fundamentals continue to be broadly solid,” he said, adding that “the sharp U-turn we’re seeing in Chinese policies will provide a much-needed boost to global growth, mitigating some of the tail risks for emerging markets and providing further support.”
Excess demand for offerings, falling new issue concessions and the largest inflows into high-grade US credit in more than 17 months has helped make this year’s January borrowing so far the busiest ever. Global issuance of investment- and speculative-grade government and corporate bonds across currencies reached $586 billion through Jan. 18, the biggest tally on record for the period, according to data compiled by Bloomberg.
Bloomberg Intelligence forecasts US investment-grade bonds will return 10% this year after their worst performance in half a century in 2022. That’s more than double their forecast for US junk debt, as higher-quality notes often benefit more than junk when economies slow. Emerging-market and investment-grade euro-denominated credit should advance 8% and 4.5% respectively, according to the analysts.
Here are some other notable themes seen so far in 2023.
The surge in global bond sales to start the year has been uneven. Debt issuance in euros is smashing records, climbing about 39% compared to a year earlier, according to data compiled by Bloomberg. Dollar bond sales are running roughly in line with last year’s robust pace, the data show.
There also already signs that issuance is set to slow in some regions. Chinese onshore issuers are set to be off for a full week beginning Jan. 23 for Lunar New Year holidays, likely reducing supply in Asia to a crawl, market observers say.
Financial firms have led the charge in global issuance this year as a sector, with year-to-date sales reaching almost $250 billion.
Junk’s Slow Start
One of the few markets struggling to find its footing in terms of issuance is that for speculative-grade debt. Offerings from high-yield corporate and government issuers are running at the slowest pace since 2019, with about $24 billion priced through Jan. 18. That’s likely in part because junk-rated firms that had extended maturities in years past are waiting for interest rates to decline further before taking the plunge. Investor cautiousness about how those borrowers may weather a global recession is also a likely factor.
Still, there are signs that demand may soon pick up.
“We are still quite defensively positioned given that we are yet to see the full impact of the rate hikes on the real economy and earnings,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “However, the discussion for us has shifted from protecting the portfolio last year to a more balanced approach where we are also looking at how to participate in the market rally.”