Junk bonds will have a record start in 2021, as Goldman sees little chance for higher rates to ‘kill the business cycle’


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That was fast. US companies deemed risky enough to guarantee sub-investment grade, or “junk,” credit ratings have borrowed about $ 32 billion in the corporate bond market so far in 2021, the fastest cut. of history. Analysts at Goldman Sachs called the new bond offering “at its best start ever,” as of January 20, or about 35% ahead of last year’s pace, “which in turn was elevated by relative to historical standards. ”

Even as the pandemic crippled much of the US economy last year, US companies borrowed record amounts in the bond market, including a big boost in January. In doing so, they have taken advantage of the ultra-low borrowing costs available through a global quest for yield and the persistence of highly accommodative policies from central banks, including the Federal Reserve. See: ECB leaves policy unchanged, but makes ‘slightly aggressive’ adjustment to statement But as the Goldman team, led by Lotfi Karoui, noted in a weekly note, around 78% of junk bond issuance from this year it has been used to pay the debt. and refinancing, or “bondholder friendliness” that allows companies to “further capitalize on historically low debt issuance costs” without necessarily increasing their overall debt burden. Biden Treasury Secretary candidate Janet Yellen and former Fed chairwoman this week said during a confirmation hearing that the best policy was for lawmakers to “go big” to support struggling Americans, by even though the federal debt is increasing. Yellen also said she would be a “voice for fiscal sanity” in the Biden administration, while pointing out both interest rates that are likely to remain low for a long time and higher rates as a risk. At the latest review, the Fed’s balance sheet was at $ 7.4 trillion, up from a recent low of around $ 3.8 trillion in August 2019. The central bank’s balance sheet has skyrocketed with the purchase of hundreds of billions of dollars in TMUBMUSD10Y Treasury debt, 1,090% and agency mortgage bonds every month since last spring, when COVID-19 infections first emerged in the U.S. For a few months, the Treasury was even Buying corporate debt for the first time, through its list of now reduced emergency loan facilities. With cash flow through financial markets, riskier assets have benefited, including U.S. stocks that posted their best opening day gain in 36 years, amid optimism about the new management’s ability. Biden to quell the pandemic and boost the economy. Still, stocks took a slight respite on Friday, after setting all-time highs within the week, with the Dow Jones Industrial Average DJIA, -0.40%, roughly 0.3% lower in market trading. late and the S&P 500 SPX index, -0.24% off at about 0.2%. The junk bond sector benchmark iShares iBoxx $ High Yield Corporate Bond ETF HYG, -0.20% declined 0.2%. Karoui’s team at Goldman expects the US junk bond market to issue $ 300 billion in bonds throughout the year, or roughly a 30% drop in the previous 12 months. The team also brushed aside growing investor concerns about the risk of interest rates rising, due to a “policy error that would ‘kill’ the business cycle.” “We continue to believe this risk is low in the current climate and we continue to believe that spreads are unlikely to widen in response to higher nominal returns,” he wrote.