Banks could be about to deluge the market with more bonds after they post quarterly results, borrowing at a breakneck pace even as other blue-chip companies pull back, and bondholders could suffer in the process.
Barclays Plc projects the six largest US banks will raise between $35 billion and $45 billion in bond markets in the fourth quarter, compared with an average of $30 billion for the quarter since 2014. In the weeks after earnings, the firms might sell as much as $30 billion, the lender forecast. Banks are selling bonds as Federal Reserve rate hikes spur depositors to put their money elsewhere, cutting into a key funding source for the lenders and forcing the firms to find other financing.
JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp. and Citigroup Inc. are the most likely to sell notes soon after posting results, according to Barclays. JPMorgan, Citigroup, Morgan Stanley, and Wells Fargo & Co. are among the companies slated to report on Friday.
Financial companies have been selling plenty of debt already this year, around $530 billion of notes through Oct. 12, about half of total investment-grade issuance. Sales volume for corporations like banks and insurers is up a bit from the same time last year even as broader volume is down by more than 10%, according to data compiled by Bloomberg News.
Banks always need funds to lend out to customers, but their demand for selling bonds has been particularly strong this year as inflation is spurring more companies and consumers to borrow, pushing loan volume higher, while deposits have been declining as cash migrates to higher-yielding places.
The firms could also begin prefunding for 2023 to comply with rules for debt that can be classified as part of the firms’ total loss absorbing capacity -- or TLAC -- for regulatory purposes, Barclays strategists led by Peter Troisi wrote in a note on Wednesday.
“We believe banks are willing to issue at wider spreads to achieve these priorities given the uncertainty in the market,” wrote the analysts.
New issuance starting next week could reopen US high-grade bond sales, which came to a halt this week as rising borrowing costs and inflation data scared borrowers away. If no deals are issued on Friday, it would be the third week this year without any issuance.
Not everyone expects a wave of sales from the companies. JPMorgan analysts Kabir Caprihan and Nikita Dyatlov anticipate the biggest banks will sell between $18 billion and $20 billion of bonds this month, below the roughly $24 billion level implied by historical averages for monthly issuance as a percentage of supply. These bond sales also trailed historical averages last month, a “sign of moderating supply for the rest of the year,” the analysts wrote in a note dated Oct. 11.
Bloomberg Intelligence credit analyst Arnold Kakuda is projecting $20 billion to $30 billion in bank supply for the fourth quarter since the sector has already been more active than expected this year, a figure he previously thought would be more like $20 billion, but that is still below last year’s fourth quarter and 2020’s as well.
Prospective bank issuers will have to pay up to borrow amid widening risk premiums. The average spread on a financial institution bond was at 1.77 percentage point as of Wednesday, the widest level since June 2020, according to Bloomberg index data. Spreads on the broader high-grade bond index were tighter at 1.65 percentage point.
The amount and timing of issuance can be a key driver of bank bond performance over short periods of time, according to Arvind Narayanan, a senior portfolio manager and co-head of investment-grade credit at Vanguard Group Inc. Investors should choose their bank bonds carefully, he added.
Baylor Lancaster-Samuel, vice president of fixed income at Amerant Investments Inc., expects investor demand for bank debt to remain relatively strong, as the securities pay wider spreads than other investment-grade notes, particularly given their relatively low credit risk.
“The playbook will be more like the 2001 cycle than in 2008, with notable stress on credit quality and earnings, but without the existential threat to the entire system,” said Lancaster-Samuel. “For our clients, who are mostly looking for income, a 6% yield for a solid investment-grade name for 10 years is not bad at all.”
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