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The training wheels came off without a hitch.
The lapse of the Federal Reserve’s inaugural corporate debt-buying program at year’s end didn’t hold up the parade of highly rated companies from borrowing in droves in the bond market Monday.
Home Depot Inc. HD, -0.64% and John Deere Capital Corp. DE, -0.52% were among the lineup of companies that in the first trading day of 2021 raced to borrow from the deep well of the U.S. investment-grade bond market.
Both companies fetched attractive pricing for their debt, even as U.S. stocks sold off and a highly-contagious variant of COVID-19 found in California and upstate New York prompted a new national lockdown in the U.K.
“If people were looking for large new-issue concessions, they didn’t see it today. I’m hoping we will,” said Tom Murphy, Columbia Threadneedle Investment’s head of investment-grade credit, adding that the month of January often can bring heavy new-debt issuance.
“But I’ve always been in the camp that supply comes when the market is well-functioning, which usually means tighter spreads,” he said.
Spreads are the amount investors are compensated on bonds above a risk-free benchmark, often Treasurys TMUBMUSD10Y, 0.922%. Bonds offering more spread can point to riskier investments or an overall skittish market.
John Deere’s farm-equipment financing arm was able to borrow $1.5 billion Monday through a two-part issuance. Its longest, 10-year class priced at a spread of 57 basis points above Treasurys, or a yield of 1.48%, according to a person with direct knowledge of the dealings.
Home Depot sold a $3 billion three-part bond deal, with its 10-year slug priced to yield about 1.44%. Spreads tightened on both deals from initial levels, indicating high demand among investors, while lowering borrowing costs.
Many large companies have been able to borrow at rock-bottom rates during the pandemic, mainly after the Fed this spring unveiled plans to start buying up corporate debt for the first time ever. While the Fed never used a lot of its firepower, its backstop has been considered a vital cog in keeping credit flowing.
In November, Treasury Secretary Steve Mnuchin surprised markets after President Donald Trump’s failed reelection bid, with an announcement that several emergency lending programs administered by the Fed would be allowed to expire on Dec. 31. This included the Fed’s corporate bond-buying effort.
By that time, the bulk of the record $1.86 trillion U.S. investment-grade bond issuance for the year had already occurred, a 54% increase from 2019, according to BofA Global Research. While the team expects issuance to slow this year, a busy January still could mean another $100 billion or more of supply this month — the first without the Fed backstop.
BofA’s team put together this chart on past issuance in January and its 2021 forecast:
January is a big month for debt
BofA Global
Murphy said he expects issuance for January to reach almost $150 billion.
“As long as rates stay in this Zip code, I’m still going to expect more corporate bond issuance,” said Wendy Wyatt, a portfolio manager at DuPont Capital.
“The Fed stepped in and created ultimately liquity,” she said, adding that a lot of the new debt has gone toward tendering and calling older bonds at today’s low rates, meaning that leverage has not gone up so much. “But as a bondholder, I’m still going to be leery about it.”
