Corporate Bond Issuance Pushes Spreads Wider

The third straight year of record corporate bond issuance has recently given investors pause as they look at allocating capital to the sector. Through mid-November, $1.034 trillion of investment grade corporate debt has priced, up 7% from last year. Corporations were especially busy issuing bonds in November ahead of the typical market slowdown between Thanksgiving and New Year’s. Led by Internet company Alibaba’s $8B deal, November issuance through the 17th was $107 billion. In addition to funding share repurchases and dividends, much of the debt is being issued for merger and acquisition activity, particularly in the healthcare space. M&A activity year-to-date recently topped $3 trillion, which is higher than any full year since 2007. Debt issuance for these purposes (share buybacks, dividends and M&A) is what we would call “unfriendly to creditor activity,” and has put pressure on credit spreads. According to Barclays, the difference in yield between investment grade corporates and Treasurys reached 1.24% last week, up from 1.0% as recently as July. This underperformance has created attractive relative value in the space, and our recent purchases of certain corporate issues reflect our taking advantage of the sell-off. Should credit spreads continue to widen, which could happen if these issuance trends continue or if financial market volatility increases, look for us to continue adding exposure to the space.               
 
Barclays, Wells Fargo, WSJ