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Corporations Pile Into Bond Market as Borrowing Costs Drop

Molly Smith

(Bloomberg) -- Floodgates have opened in the corporate bond market as issuers capitalize on some of the cheapest funding costs of the year.

Credit risk premiums have been tightening as investors pour money into corporate bond funds. That’s encouraging companies to borrow, with AbbVie Inc. looking to price the year’s largest sale Tuesday, and at least 10 new deals in the junk-bond market.

It all adds to a bullish outlook as recession fears have abated amid stronger economic data and progress in U.S.-China trade talks, Bank of America Corp. strategists led by Hans Mikkelsen said in a report Friday. Investors expect spreads to tighten further in the next three months, but could widen over the longer-term, the strategists said, citing a November survey.

With that in mind, issuers are looking to get in now while the getting’s good. Since the Federal Reserve lowered rates for a third consecutive time last month, Treasury yields have been rising as investors perceive the cutting to be done for now. Companies may be concerned that rates are only rising from here, said Ken Monaghan, co-director of high yield at Amundi Pioneer.

And with most of third-quarter earnings done, and largely better than feared, equity markets have been supportive for corporate spreads, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors.

“That gives you comfort that the market is relatively healthy,” Elfner said. “There’s still good demand out there for high quality names.”

Investment-grade spreads are hovering at 105 basis points over Treasuries, the lowest level since October 2018. High-yield premiums meanwhile came in 16 basis points last week alone, and should rally further alongside rising stocks and oil prices. High-grade funds have seen inflows in all but one of the last 23 weeks, and high-yield funds, with the exception of a small outflow last week, had drawn in money in the three prior weeks, according to Refinitiv Lipper.

AbbVie is borrowing $30 billion to help fund its purchase of Allergan Plc -- which could catapult this week’s high-grade sales to $45 billion, double last week’s total. High-yield issuers, most of which are refinancing debt, are contributing to what will the busiest day for supply in three months.

“As the cost of debt remains low, you’ll see issuers rush to beat the holiday slowdown and join the party to issue,” said Lon Erickson, a portfolio manager from Thornburg Investment Management.

(Updates with AbbVie deal size in the penultimate paragraph)

--With assistance from Natalie Harrison and Elizabeth Rembert.

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Christopher DeReza

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