The high-yield bond market is becoming a favorite of companies that once raised cash using leveraged loans, luring borrowers with lower costs and a wealth of investor demand.
US firms have sold $55 billion of secured notes in the junk-bond market so far in 2023, marking a 17% year-over-year increase, according to CreditSights data. It’s the biggest issuance jump in more than a decade — and an indication that companies are replacing floating-rate debt in the wake of the Federal Reserve’s most-aggressive monetary tightening cycle in decades.
“It’s a good way to balance each of these markets off each other, and honestly, a better cost of capital,” said John Cokinos, global head of leveraged finance at RBC Capital Markets. “You can hedge naturally by just having fixed-rate debt.”
The conclusion that now is the time to issue fixed rate debt is an interesting one. It reflects the acceptance of the view that rates are going to stay high indefinitely and are unlikely to contract. The good news for borrowers is they can always refinance when yields decline but that does come with costs. The cheaper option would be to issue floating rate debt today on the expectation rates are unlikely to stay high forever and seek to refinance with fixed rates later.
10-year Treasury yields posted a downside key reversal today as economic statistics came in below expectations. The worry about deficits which drove yields higher early this week has been replaced with concern about the “long and variable lag” of monetary policy.
That led to the initial rebound in the Nasdaq-100 reversing into the close. With Apple pulling back sharply on predictably slower iPhone sales, the balance of probabilities points towards mean reversion.