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Passanten in New York
| Foto: Imago Images / Levine-Roberts
Very few US corporations will have completed their refinancing activities for 2024 by the beginning of September. The summer phase, which is now drawing to a close, is usually a kind of slow period, because in addition to thinned liquidity, which affects all stock exchange trading, issuance activities on the corporate bond market are also rather sparse.
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Hope for falling interest rates versus uncertainty due to US election
Companies that want to take on additional debt capital in the coming weeks are faced with the following balancing process: On the one hand, there is the justified hope of waiting for interest rates to fall and thus for refinancing costs to fall. After all, the word is already out of the woodwork that central banks on both sides of the Atlantic will reduce their key interest rates in the coming weeks and months, which has already been anticipated by the stock markets and incorporated into market returns.
On the other hand, it can be assumed that as time dwindles until the US presidential election, the capital markets will be exposed to repeated flare-ups of volatility, which will also lead potential investors in new issues to exercise temporary restraint. Refinancing activities would therefore certainly face challenges, at least in the meantime.
Security creates opportunity costs
In business administration, opportunity costs are a frequently observed phenomenon by which different courses of action are compared and contrasted. In the scenario described above, these are characterized in such a way that an early issuance of new bonds at a given and an increased interest rate does indeed provide refinancing security, but this is achieved at the cost of higher refinancing costs.
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Additional interest premium results in attractive subscription returns
Historically, it has often been seen that investors in new issues were voluntarily granted a certain amount of yield premiums in order to encourage their willingness to subscribe. In addition to the sum of the risk-free interest rate and the risk premium appropriate to the term, companies seeking capital regularly provide an additional yield premium in order to improve the attractiveness of their own issues. Such examples suggest a similar picture of the future issue market.
Emissions are brought forward
It can be assumed that many treasurers will accept higher risk-free interest rates in the coming weeks as the basis for calculating the subscription yields of their bonds in order not to put too much issuance activity on one card as the US election approaches and the end of the year. By raising capital early, companies are buying themselves (refinancing) security and avoiding the challenges that a close and therefore uncertain race for the US presidency could bring with it.
Attractiveness for subscribers of new issues increases
For investors in corporate bonds, the scenario described offers opportunities for attractively valued new issues and positive short-term subscription returns. If the new bonds quickly adjust to the justified yield level on the secondary market, this will be accompanied by rising prices and price gains for those who subscribe to the primary market. It will therefore be exciting to follow the corporate bond issue market more closely in the coming weeks and to become active in selected securities. If the risk-free interest rates do indeed fall in the coming months, there is also justified hope for further price gains.
About the author:
Andreas Schyra is a board member of PVV and lecturer at the FOM University in Essen.
