The year started well for primary-market issuers. During the first six weeks of 2020, a strong macroeconomic picture and the reach for yield pushed credit spreads to the lowest level for almost a decade and encouraged firms to tap credit markets in a bid to increase returns for shareholders.
Concerns about an escalation of the US-China trade war and the upcoming US election – and the possibility that the administration’s policies could change – also encouraged corporates to turn to credit markets early on in the year.
The eruption of the pandemic and oil-price shock ushered in an unexpected bout of volatility, liquidity concerns and fear that there would be a material decline in economic activity. In turn, this also put pressure on companies to raise debt in order to improve their liquidity profiles in the new normal of economies in lockdown and changed consumer and business behaviours.
All these factors resulted in elevated issuance in most parts of credit markets this year. While issuance for general corporate purposes should slow for the rest of the year, refinancing is likely to pick up in response to the fact that the market-implied funding rate has reached a new low relative to the current funding rate (see figure 1).
Figure 1. An uptick in refinancing is likely
Source: ICE Bond Indices, as at August 2020.
For now, this is mostly visible in US investment grade, where the differential is at its highest point in almost ten years – a reflection of the convergence in US interest rates with those in the rest of the developed world and strong demand for high-quality credit.