U.S. high-grade issuers issue $33 billion of debt in the first three days of the week, twice as much as expected
As lawmakers haggle over the details of a Republican tax-cut plan, U.S. corporations aren’t taking any chances.
U.S. corporations are rushing to issue debt amid uncertainty over tax legislation, including how much of their interest payments will be eligible to be deducted from taxable earnings. In October alone, high-grade issuance hit a monthly record of $131 billion.
Activity in the bond market heated up further after the tax proposal outlined by the House Ways and Means Committee called for capping the interest expenses businesses would be allowed to deduct at 30% of taxable profits, limiting how much companies could save on taxes by loading their balance sheets with debt.
“This week we’ve seen a tremendous amount of supply hitting the market. Corporations are trying to issue debt ahead of any tax changes taking place,” said Dominic Pappalardo, director of the taxable-portfolio management team at McDonnell Investment Management.
Highly rated U.S. corporations issued around $33 billion in debt in the first three days of the week. Leading the way were the unexpected issues of $10 billion in debt by Oracle ORCL, +0.16% and $7 billion by Apple AAPL, -0.33% That contributed to the $1.3 trillion of debt sold by creditworthy companies so far this year, which is on pace to exceed last year’s total of $1.34 trillion, according to Dealogic.
The flood of fixed-income issuance has sparked “carnage,” slamming corporate paper and widening credit spreads, said strategists at Bank of America Merrill Lynch (see chart below). An increase in issuance can drive prices lower as bond-buyers have a stronger hand in price negotiations.
The Bank of America Merrill Lynch U.S. Corporate BBB option-adjusted spread, a measure of how expensive investment-grade bonds are relative to safe U.S. government paper, has widened by six basis points since Oct. 27.