For years, investors have gorged on corporate debt. Now they’re showing signs of being full.
Fewer orders are coming in for new bonds, relative to what’s for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It’s the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit.
“Investors are starting to be a little more disciplined,” said Bob Summers, a portfolio manager at Neuberger Berman, which manages about $130 billion of bonds. “They aren’t just waving in every deal now.”
Money managers’ restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012, according to Bloomberg Barclays index data. Even with CVS Health Corp.’s $40 billion issue last week, sales volume for new investment-grade corporate debt is at its lowest level so far this year since 2014.
Outflows from mutual funds and exchange-traded funds, coupled with reduced corporate bond-buying have created a tough first quarter for investment-grade bonds, said Yuri Seliger, a credit strategist at Bank of America Corp.
“The negatives are winning out right now,” Seliger said.
Take Campbell Soup Co., which sold $5.3 billion of bonds this week to fund its planned acquisition of snack-maker Snyder’s-Lance Inc. Typically, bankers start selling the deal to investors at a relatively high yield compared with Treasuries, which they decrease as demand increases. In this case for the biggest parts of the deal, they never did, and the bonds weakened relative to Treasuries after they were sold.
That’s been a problem for new issues in general this month. While companies often get orders for three or four times as many bonds as are for sale, at the beginning of the week order books were barely two times covered, Bloomberg data show. Borrowers paid yields that were an average of 0.11 percentage points higher on new deals compared with their existing securities last week, a new issue concession much higher than the 0.013 percentage point-average for the year. And yields relative to Treasuries weakened on more than half of new issues on Monday and Tuesday, according to data from Bank of America Merrill Lynch.