US companies and governments are hesitant to sell bonds now

(Bloomberg) – Recent surges in bond yields have companies and governments reluctant to borrow across a wide range of U.S. debt markets, signaling that expected Federal Reserve rate hikes and fears of stagflation are already slowing the economy. flow of credit in the economy.

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State and local governments are only expected to sell $6 billion in bonds this week, about 17% below this year’s average, and volume is down for the year. In the US junk bond market, issuance for 2022 is the slowest in six years.

In asset-backed securities, two issuers postponed bond sales until late last week, including car lender World Omni Financial Corp. Overall sales volume is about the same as last year, but some borrowers are clearly thinking twice before borrowing. In the investment grade corporate bond market, issuance is also comparable to last year, and sales this month have been relatively strong. But companies increasingly retreat when yields rise. On Tuesday, at least three borrowers decided not to announce transactions.

The hesitation comes as the Fed is expected to start raising rates at its meeting this week. On Monday, traders in the rates markets were expecting seven hikes this year. Those worries helped push yields on the benchmark 10-year U.S. Treasury note to 2.13% on Monday, the highest since mid-2019.

On Friday, auto finance firm World Omni postponed the sale of bonds backed by auto leases after it had already begun the process of marketing asset-backed securities. He was surprised by the magnitude of the rise in borrowing rates.

“The agreement is being restructured to take into account the recent change in the benchmark interest rate,” said Eric Gebhard, group vice president of finance and treasurer of JM Family Enterprises, the parent company of World Omni, in an emailed statement. “We expect the deal to progress at a later date.”

The nearly $824.5 million ABS began premarketing, an early but formal step in the sales process, on March 8. The collateral backing the obligation was the principal borrowers’ automatic lease payments. World Omni has been selling asset-backed auto loans for more than 20 years, according to data compiled by Bloomberg. The arrangers of the deal, Bank of America Corp., Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc. and Wells Fargo & Co., all declined to comment.

Another ABS deal from “buy now, pay later” lender Affirm Holdings Inc. was also delayed on Friday due to market volatility. The transaction was backed by consumer installment loans.

For asset-backed assets, higher benchmark rates can alter the economics of a transaction if the gap between income from underlying assets and interest paid on liabilities narrows too much, investors said. , a so-called “falling excess spread”.

“For ABS as a whole, higher rates likely affect excess spreads and the overall economics of recent trades,” said Clayton Triick, senior portfolio manager at Angel Oak Capital Advisors.

Elsewhere in the debt markets:

Americas

Macquarie as the only deal in the high-grade dollar market on Tuesday.

  • Tank Holding Corp., a maker of bulk storage products, is trying again to sell a $1.685 billion unitranche loan it previously postponed due to market volatility

  • The investor craze for leveraged loans at the start of the year is well and truly over

  • Puerto Rico’s record bankruptcy comes to an end as it prepares to reduce its $22 billion debt through a bond swap, a crucial step that aims to help the Commonwealth boost its economy and repair his finances

EMEA

On Tuesday, issues in the European primary market are again limited to higher-rated and safer transactions, including covered bonds for Royal Bank of Canada and HSBC SFH France. The sales will bring the March sales total to around 50 billion euros.

  • The next step for Russia is a potential default that could cost investors billions and exclude the country from most funding markets. Warning lights are flashing as the government kicks off the process of paying $117 million in interest on dollar bonds on Wednesday, a key moment for debt holders who have already seen the value of their investments plummet since Russia invaded Ukraine last month

  • Germany is preparing to increase the supply of a rare bond entangled in Russian sanctions, a move that will likely ease pockets of tension in European repo markets

  • The war in Ukraine has taken investors back to cash, with allocations at their highest since April 2020, according to BofA’s Global March Fund Manager Survey

  • Swedish property developer Oscar Properties plans to ‘increase its exposure to green finance’, according to company’s updated financial targets

Asia

Investors in Asian investment-grade dollar bonds are hurt from all sides as concerns over China’s ties to Russia collide with concerns over an impending Federal Reserve interest rate hike this week.

  • Spreads on Asian bonds widened by five to six basis points on Tuesday, while yield premiums on Chinese bonds climbed about 10 basis points, traders said. That leaves bond spreads in the wider Asian region on track for their biggest explosion for any quarter in two years, according to a Bloomberg index.

  • Shares of Chinese developers fall the most in more than a decade as a rout in the domestic stock market hits the struggling real estate sector particularly hard

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