Key takeaways

  • With bond redemptions expected to increase and bank issuance to decrease, 2023 may shape up differently for the IG markets as demand exceeds the supply of new debt.

  • The key difference between this year and last is the higher cost of borrowing that companies face after Fed hiking. This year, corporate borrowers will have to contend with higher fixed rate funding costs as they consider near-term liquidity needs, which could dampen total supply.

  • Higher funding costs, higher redemptions, and lower bank supply may lead to lower net issuance, which could lead to a positive technical tailwind in the IG market if bond supply falls short of buyer demand.

The U.S. investment grade credit (IG) market’s voracious appetite for bonds may not be fully satisfied in 2023. In 2022, feast or famine punctuated the $1.22 trillion supply, as nearly 50 days featured no issuance. Corporate borrowers glommed together and found strength in numbers when they issued debt, striking when the iron was hot. This binary backdrop has characterized the IG market since the early days of the pandemic when the Federal Reserve (Fed) injected much-needed liquidity into corporate bonds. Even in the dog days of August, when issuers typically take a break from borrowing, we have seen a pronounced issuance increase as companies seized the chance for favorable funding. This pattern of supply following demand may change this year; with bond redemptions expected to increase and bank issuance to decrease, 2023 may shape up differently as demand exceeds the supply of new debt.

We expect 2023 gross supply to approximate last year’s level with issuance driven by company funding needs and flexibility. With $700 billion of maturities due in 2023, that would suggest a net issuance of around $500 billion and confer 6% growth for the IG market. Rising stars—companies whose debt receive the coveted investment grade rating—and inaugural issuers would drive this forecast up, while tenders and calls would push it down. In terms of tenders, we saw limited liability management activity last year versus the record years of 2020 and 2021. This activity could pick up as companies realize the lower dollar price of outstanding debt.

Recessionary headwinds may mean saturated issuance windows in 2023 like last year. As the chart below shows, 2022 saw sporadically heavy supply with 44 days of zero IG deals—an all-time high and more than double the 10- year average.

Number of days with no issuance

Bar graph showing number of days with no supply issuance from 2012-2022

Source: Barclays. As of December 2022.

To show the divergence in daily supply from another angle, an average month saw nearly ¾ths of its supply issued in the busiest five days last year. Companies have raised the bar over the past few years, prefunding and locking in debt in favorably low interest rate environments. A $1.2 trillion market total in 2023 would be the average annual IG tally of the past five years, except the outsized year of 2020.

Percent of monthly supply issued in top five days in 2022

Bar graph showing percent of monthly supply issued in top five days in 2022

Source: Barclays. As of December 2022.

Despite stable supply levels over the past few years, the mix by sector and tenor has changed tints. Indeed, we saw significant bank issuance last year driven by the U.S. money center banks —the most significant supply surprise of 2022. For context, Financials made up more than half of the total 2022 new issue volume (52%) — the most in 15 years. Financials saw nearly a 10% higher annual volume, while Non-Financials saw supply 25% lower. Because of this mix shift last year, we expect the seesaw to tilt the other way as supply from the money center banks contracts.

Because the Big-6 Banks* had such a borrowing binge last year, another feasting feat like that seems unlikely. The largest banks came to market in size last year because they were flush with deposits and sought funding before rate hikes and any market volatility. The money center banks will remain active issuers this year, likely with a lighter cadence. One area that stands to see higher issuance is the regional banks. They have impending maturities and face deposit pressures, plus proposed total loss absorbing capacity (TLAC) rules for larger regionals adding to supply needs. Rounding out the financial forecast, we expect insurance and Yankee bank supply near 2022 levels. Overall, we see Financials comprising half of the total 2023 supply figure, or roughly $600 billion.

The key difference between this year and last is the higher cost of borrowing that companies face after Fed hiking. For industrial supply implications, we think that Industrials will make up a little less than half of total gross issuance. We expect Consumer Non-Cyclicals to account for the largest volume from Industrials, driven by Pharmaceuticals and Food & Beverage, with the former having the most maturities. After factoring in higher redemptions, net Industrial issuance could shake out around $300 billion. This year, corporate borrowers will have to contend with higher fixed rate funding costs as they consider near-term liquidity needs, which could dampen total supply.

In 2022, many M&A deals got announced but did not fund. With yields now higher, Industrial and Utility supply may be lower, but M&A issuance should surpass last year’s $120 billion. To that end, the corporate debt M&A backlog stands at nearly $180 billion. However, economic headwinds could cool any plans for M&A-related issuance. Another factor to consider is that U.S.-domiciled issuers did not fund much in non-USD markets last year. If that reverses, higher reverse-Yankee issuance could lower total U.S. IG issuance.

Elevated funding over the past five years has made the largest debt issuers even larger. Indeed, 60% of the top 50 corporate issuers in the index have raised leverage. However, last year bucked that trend; issuers increased leverage by a mere ~0.3X (excluding Boeing). With funding costs rising from historic lows, that increase in leverage is almost negligible when compared to the 1.3x increase in 2021.

Utility supply has scaled back below $100 billion in recent years, and we expect that trend to continue. With redemptions of $100 billion this year, net issuance may be flat. We expect the pipeline subsector to be the largest Utility subsector. The one swing factor is that Utilities may seek new debt to fund grid improvements and green transitions. Focused on clean energy, Utilities will likely issue ESG bonds. Last year, they issued 22 ESG deals totaling $14 billion.

In summary, we expect herd mentality to mark 2023 issuance patterns as narrow market windows offer favorable times to bring debt. We foresee that higher funding costs, higher redemptions, and lower bank supply will lead to lower net issuance, offset in part by higher M&A debt deals. We believe this scenario will lead to a positive technical tailwind in the IG market if bond supply falls short of buyer demand.

*Big-6 Banks refers to JP Morgan Chase, Bank of America, Citigroup, Morgan Stanley, Goldman Sachs, and Wells Fargo.

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