Anxiety is back in the market for high-grade debt thanks to heightened Treasury volatility, a slew of corporate earnings and rising geopolitical tension. — Bloomberg
NEW YORK: Banks are taking a cautious approach in the investment-grade bond market amid some of the wildest swings in Treasuries in recent memory, waiting for pockets of calm to emerge as they seek to borrow before US officials can raise interest rates or tighten regulations further.
Truist Financial Corp has been the lone lender to test investor appetite for new bonds in the United States this week, marking a sharp slowdown after a US$24.5bil rush of fresh, post-earnings issuance last week.
Bank of America Corp, Citigroup Inc and Morgan Stanley have all held off selling debt.
Even regional lender M&T Bank Corp has remained on the sidelines after holding meetings with investors.
Anxiety is back in the market for high-grade debt thanks to heightened Treasury volatility, a slew of corporate earnings and rising geopolitical tension.
That’s adding extra complexity for banks that are under pressure to borrow at current rates – especially as the Federal Reserve (Fed) looks set to keep borrowing costs elevated after one more potential increase.
“I would have expected some more mid-size regional banks to come to market this week,” said Arnold Kakuda, a senior financials credit analyst at Bloomberg Intelligence.
“But maybe they’re just waiting for things to settle down.”
Sales volumes have been muted overall this week in the blue-chip market, standing at just US$5.05bil – well short of the US$20bil expected, according to data compiled by Bloomberg. Truist on Wednesday sold US$1.75bil of new notes maturing in 2029.
The average extra yield investors demand to hold bank debt was 150 basis points as of Tuesday, 23 basis points more than the average for broader high-grade debt overall.
Representatives for Truist, Morgan Stanley and M&T didn’t respond to requests for comment. Representatives for Bank of America and Citi declined to comment.
“With earnings season underway, the Fed meeting looming and Treasury refunding at the top of mind, the pace of investment-grade supply is likely to remain subdued until the market clears those hurdles,” said Winnie Cisar, global head of strategy at CreditSights Inc.
The cautiousness in high-grade markets comes after a string of bank bond sales last week, which included both Wall Street behemoths like JPMorgan Chase & Co and regional lenders such as PNC Financial Services Group Inc.
JPMorgan, Wells Fargo & Co and Goldman Sachs Group Inc all tapped debt markets last week and sold bonds due in 11 years as part of their debt packages.
While portions of those deals were met with strong demand, the bonds have since started to trade lower as sentiment sours.
PNC and US Bancorp, meanwhile, last week sold fixed-to-floating rate notes, while Mitsubishi UFJ Financial Group Inc priced the first dollar-denominated Additional Tier-1 bond by a Japanese lender.
Most of these deals, as usual, followed earnings reports by the lenders. The longer-dated bonds sold suggest that some banks preferred to lock in current interest costs in anticipation that rates move even higher.
It makes sense for financial firms to issue debt now when windows of opportunity open up, said Baylor Lancaster-Samuel, chief investment officer at Amerant Investments Inc.
With higher capital requirements looming in the United States, some banks may prefer to raise capital now, before costs rise any further.
“Over time, you will see that these institutions hit an attractive window much more often than they miss one,” said Jay Anderson, head of high-grade financial institutions group debt and equity capital markets at UBS Group.
“These money-centre banks, and increasingly the larger regionals, continue to need to access the debt markets for funding and maintaining long-term debt requirements.”
Regional lenders, in particular, are expected to ramp up activity in primary markets in anticipation of stricter regulation, according to Bloomberg Intelligence.
“Banks will probably just try to slowly boost up that issuance rather than having to wait until the last minute and issue a huge amount,” said Collin Martin, fixed-income strategist at Charles Schwab & Co.
“The high-yield environment we’re in right now isn’t going to prevent banks from issuing.” — Bloomberg
