The bond issuance frenzy is here! The global issuance scale reached USD 185 billion in the first week, with corporate bonds being more "attractive" than government bonds

According to Zhitong Finance APP, borrowers are flooding into the global bond market at an unprecedented pace, causing corporate bond spreads to fall to their lowest levels in nearly 30 years. Data shows that as of Tuesday, global corporations and governments have raised approximately $184.5 billion this year through the issuance of various bonds, with more transactions expected to be priced later this week.

As the debt market enters a risk-on mode, the financing volume in the European bond market set a record on Tuesday, while Wall Street predicts that the financing scale in the U.S. could reach a record $200 billion in January. Strong demand has also fueled a borrowing boom in the leveraged loan market, with over $33 billion in transactions initiated in the U.S. this week, according to Bloomberg data.

Pension funds and insurance companies are eager to lock in higher yields before central banks cut interest rates, thus they are willing to accept lower risk premiums. According to preliminary data from EPFR, the demand from these funds and insurance companies helped bond funds set a record for annual inflows last year, and more funds are expected to flow into this asset class this year, overshadowing traders' concerns about the U.S. government's fiscal deficit and the potential rebound of inflation.

Alfonso Peccatiello, Chief Investment Officer of Palinuro Capital, stated, "Issuers are taking advantage of the calm market, low volatility, and narrow spreads before January 20—Trump's announced tariff policy could disrupt this feast. To achieve record issuance levels, a large number of investors must be ready to commit funds. This is indeed the case, proving the extent to which animal spirits are at play here." It is understood that Trump will be sworn in on January 20.

In particular, corporations now have ample reason to issue as many bonds as possible. The influx of funds has driven down borrowing costs, bringing corporate bond spreads (the premium over comparable government bond yields) close to historical lows. This enables them to cope with geopolitical turmoil that may lead to rising borrowing costs later this year.

Sebastien Barthelemi, Head of Credit Research at Kepler Cheuvreux, stated that for these borrowers, "a bird in the hand is worth two in the bush," as refinancing will allow them to focus on their business rather than maturing debt.

Issuers typically issue bonds in large volumes during the first week of January.

Concerns Over Fiscal Deficit

On the government bond side, fiscal deficits are raising some concerns ahead of the anticipated issuance wave. Torsten Slok, Chief Economist at Apollo Global Management, stated that U.S. Treasury yields are rising so quickly that there is a risk of market turmoil, partly due to the expanding debt burden in the U.S.

The U.S. Treasury's bond issuance for this year began on Monday, issuing $58 billion in three-year Treasury bonds, with demand appearing somewhat weak, while a $39 billion auction of 10-year U.S. Treasury bonds on Tuesday was completed at the highest yield of 4.68% since 2007. On Wednesday, $22 billion in 30-year U.S. Treasury bonds will also be auctioned The UK also has similar concerns. On Tuesday, the long-term borrowing costs in the UK reached their highest level since 1998, increasing the likelihood of further tax hikes to meet fiscal rules.

Emerging markets have also joined the bond issuance frenzy. On Tuesday, many countries, from Chile to Hungary to Slovenia, were issuing bonds. Previously, Saudi Arabia and Mexico also conducted large-scale bond issuances. As one of the largest bond issuers in emerging markets, Saudi Arabia issued $12 billion in bonds last year to fund its massive economic transformation plan. Mexico issued a record $8.5 billion in bonds, exceeding half of its annual hard currency debt limit.

Corporate Bond Issuance Welcomes Spring

Unlike governments, concerns about the health of corporate balance sheets are much lower. Investors are so unconcerned about default risks that they no longer require high premiums to hold riskier bonds, and junk-rated companies are preparing to take advantage of this trend.

Spreads on bonds of various credit ratings are narrowing.

Citigroup strategist Michael Anderson expects that the issuance of high-yield bonds will grow by more than 30% compared to 2024, reaching $370 billion. 2024 is expected to be the seventh busiest year on record. The strategist noted that a recovery in merger and acquisition activity is also expected to help drive the high-yield bond market's robust growth.

Meanwhile, the global composite yield (a measure that includes spreads and the underlying security interest rate) remains close to its highest level since the financial crisis. This environment is more likely to persist this year, as traders have been lowering expectations for further interest rate cuts in 2025, especially regarding the Federal Reserve's rate cuts. They now expect that the Federal Reserve will not cut rates more than twice this year, and the Bank of England will cut rates twice this year.

Additionally, the yield on U.S. BBB-rated dollar corporate bonds is significantly higher than the yield on the S&P 500 index. JPMorgan analysts Eric Beinstein and Nathaniel Rosenbaum wrote in a report on Monday that at the beginning of this year, the yield on U.S. high-rated bonds reached its highest level in 16 years.

JPMorgan analysts wrote, "As we approach 2025, the 'battle' between narrow spreads and high yields will continue, and recent history tells us that yields have been winning this battle."

This situation, where spreads favor borrowers and yields favor buyers, lays the foundation for the bond issuance wave.

Fabianna Del Canto, co-head of capital markets for Europe, the Middle East, and Africa at Mitsubishi UFJ Financial Group, stated, "The reallocation of funds maturing in December and January back into funds means buyers have ample cash to allocate."