Corporate Bond Issuance Gushes: What Does That Mean for the Year?

Demand is strong for investment-grade paper, less so for junk.

What a difference a new year makes. Investment-grade corporate bonds are heading for a record first two months of the year, enticed by sweeter yields. Some $283 billion in bonds have been issued thus far in 2023, Bloomberg data indicate.

New investment-grade bond sales topped the two-month record set in 2017 ($279 billion) and handily eclipsed 2022’s issuance ($237 billion). The average investment-grade yield is now 5.5%, according to S&P Dow Jones Indices. That compares very favorably with the yield from 12 months before, 2.3%.

March is expected to see smaller issuance of IG bonds, which should be a help to their prices. Thus far this year, the Bloomberg U.S. Aggregate Bond Index, which tracks Treasury and IG corporates, is up 0.35%. While small, that return is far better than the negative 13% the index suffered in 2022, as the Federal Reserve pumped up interest rates.

Despite persistent inflation, many investors are betting that the Fed is near the end of its tightening regime.

Bond investor spirits, dashed by 2022’s rout, are rising. “Bond investors experienced the worst year ever for core bonds last year,” wrote Lawrence Gillum, fixed income strategist for LPL Financial. “So the prospects of another year like 2022 could be hard to fathom.”

At the same time, rising interest rates also don’t promise a bonanza for 2023 either, he added. As Gillum saw things, “Despite the higher starting yield levels, we could see periods of negative returns” this year. After all, bonds don’t have the upward price bias that stocks do. Since 1975, he went on, “over a third of the monthly returns have been negative and close to 25% of quarterly returns have been negative.”

At the same time, high-yield corporate issuance has flagged in 2023 to date, which some observers read as a protective move in the event that the long-threatened recession finally does show up. Over the past week, investment house Nuveen said in a commentary: “The new-issue calendar for [junk] was much quieter than investment grade, with only one high-yield deal coming to market.” Still, high-yield is up 1.9% this year, as some investors favor them for their improved income.