Corporate bond issuance was robust again Thursday, and hungry investors seem to be digesting the new supply. That's good news for the economy.
Over the past two weeks, issuers have been quick to go to the bond market to sell new debt, taking advantage of the rally in Treasuries and the narrowing of credit spreads. To illustrate, the
speculative-grade credit index has narrowed 240 basis points since reaching an all-time high of 1,573 basis points on Oct. 10.
Total issuance of corporate bonds will be at least $15 billion this week and could well approach $20 billion. That's three to four times recent levels and far above the paltry levels seen in July and August when issuance reached its lowest level in six and eight years, respectively, for those given calendar months. Issuance has also gained in the high-yield market, which looks set to post its biggest weekly issuance since June.
The rebound in issuance is almost certainly welcomed by
officials, who have publicly and privately expressed concern over the widening in credit spreads that took place over the summer and early fall. Fed Chairman Alan Greenspan said as much in recent testimony before the Joint Economic Committee. In addition, these concerns were also noted in the minutes of the Fed's Sept. 24 meeting.
More Fuel for Expansion
More corporate bond issuance is positive for the economic outlook. The increased capital formation provides Corporate America with capital for expansion. Although the pickup in issuance is important, it would be more important if other measures of credit formation were stronger than they are now. Two key areas to watch are the commercial paper market and commercial and industrial loans. Both of these indicators tend to correlate strongly with inventory investment and overall growth in the economy, but they haven't yet turned in any meaningful way. (The data on commercial and industrial loans and commercial paper can be found on the Federal Reserve's Web site, federalreserve.gov, in the section on economic research and data.)
Aside from providing the economy with fuel for expansion, the stepped-up pace of issuance is a sign of a decline in risk aversion; the issuance couldn't take place without an increase in investor confidence.
On the Bright Side
Optimism in the economy may be building because of the following factors:
- Inspectors are on the ground in Iraq, and war will be delayed.
Oil is down $5 per barrel. Each dollar decline in oil's price puts about $7 billion per year back in consumers' pockets.
The Fed is extraordinarily friendly and is communicating its determination to avoid deflation and to use every available means to help the economy.
European Central Bank is poised to cut interest rates.
Congress has become a can-do Congress. Whereas the Daschle-controlled Congress arguably obstructed important legislation, the Republican-led Congress is set to take actions that will help boost the economy. The big victories by the Bush administration in the lame-duck session of Congress (homeland security, terrorism insurance) are clear signs of change. The terrorism insurance bill might help restore many of the 100,000 construction jobs lost this year.
The benefits of the massive mortgage refinancing boom are still in the pipeline.
Other key fundamentals remain solidly in place: low inventories, high levels of productivity, low inflation, low interest rates.
Economic data in early November point to an economic rebound. Jobless claims are lower, consumer confidence is higher, and manufacturing activity is rebounding.
Fundamentals for the U.S. economy appear to be the best they've been in a while and Corporate America may be taking notice, at least judging by the jump in bond issuance. Some of this good news is already factored into the markets.