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No question, it’s been a pretty bad couple of years for the bond market. Multi-trillion dollar losses etc etc. But the pain of higher rates is having little impact on actual borrowing activity.
Excluding governments, global bond issuance fell almost 20 per cent last year, but that was after a remarkable spree in 2020 and 2021, and only took issuance back to 2019 levels. Non-sovereign fixed-income sales have picked up again this year and are approaching the $6tn mark, according to S&P Global.
That’s mostly thanks to a renewed corporate borrowing binge, counteracting a decline in structured bond sales. Things have slowed down a little lately due to the recent Treasury puke, but S&P forecasts that overall issuance will expand again in 2024 (zoomable version here).
How can fixed income issuance be rebounding despite borrowing costs more than doubling over the past two years? Mostly, because it’s baked into the cake.
If you ignore certain years like 2020-21 — when there was an exceptional borrowing spree by companies securing extra liquidity and locking in ultra-low borrowing costs by accelerating existing funding programmes — the bond market’s growth is remarkably steady.
If your borrowing needs are big, banks just aren’t up for the job, and there’s plenty of debt that needs to be refinanced in the coming years (almost $2tn of corporate debt in 2025 alone). Even banks depend on bonds to finance themselves — they’ve sold over $2tn of bonds themselves already this year, according to S&P.
On the other side there are still plenty of investors who crave the (relative) stablity of fixed income, or simply require it for regulatory reasons. For example, bond funds have still seen net inflows over the past two years, according to EPFR, despite the pummelling meted out by rising interest rates.
Lastly, the bond market still throws off an incredible amount of money every year, most of which needs to be reinvested.
This is just back-of-a-fag-packet maths, but even at an average yield of just 2 per cent — roughly where it was at its low — the ~$140tn global bond market generates about $2.8tn of payments a year (which reality will obviously be higher since a lot of bonds were issued at much higher coupons).
Ever since the financial crisis there have been plenty of headlines about the “death of bonds”, but dire warnings like this are nothing new. The reality is that the bond market is a bit like the Big Lebowski: it abides.
Read the full article here