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Fear of missing out on cheap money fuels corporate bond boom

Data: S&P Global; Chart: Axios Visuals

The fear of missing out (FOMO) is alive and well on all sides of the corporate bond market.

What's happening: Much attention has been paid to the impact that rising interest rates have had on equities. But over in bonds — as U.S. Treasury yields inch higher from record lows — companies are racing to borrow money and avoid being shut out of what could end up be a fleeting opportunity for cheap money.

  • While issuers paying investors more for the risk of owning their debt is a welcome change for buyers, portfolio managers' FOMO stems from the idea of committing too early in the cycle and missing out on even higher yielding investments down the line.

Between the lines: An avalanche of deals in the corporate bond market is nothing new. The earlier boom accelerated when a collapse in interest rates created insatiable issuer demand.

By the numbers: Investment grade issuance already reached more than $95 billion in March, BofA data show. After selling $65 billion of high grade debt just last week, some predictions called for $50 billion more this week, Bloomberg reports (h/t on the FOMO analogy).

High yield: Riskier borrowers are grabbing for cash too.

  • Primary high yield issuance last month hit $37.3 billion, just below the $37.5 billion monthly record from 2012. Volume for the first two months of the year combined was $89.2 billion, up 31% from the same period in 2020, according to S&P Global Market Intelligence’s LCD.
  • Among the army of issuers, this week American Airlines priced a massive $10 billion bond and loan deal backed by its frequent-flyer program — representing the largest debt sale ever for an airline.

Yes, but: The stampede may be a temporary phenomenon, BofA credit strategist Hans Mikkelsen says.

  • “Investors are afraid of buying. You like higher yields but they don’t want to catch a falling knife if interest rates go up. So there has been some indigestion in the market,” Mikkelsen says.

What to watch: President Biden signed the $1.9 trillion American Rescue Plan Act yesterday. That stimulus, coupled with continued progress on vaccinations, falling coronavirus infection numbers, and improving economic indicators, adds fuel to the higher rates fire.

  • "The economy is going to be on fire and you are going to get economic data beating expectations solidly and there will be upward pressure on interest rates because of that," Mikkelsen adds.

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