Recent surges in bond yields are making companies and governments alike hesitate to borrow in a wide array of U.S. debt markets, signaling that the Federal Reserve’s expected rate hikes plus stagflation fears are already slowing the flow of credit across the economy.
State and local governments are scheduled to sell just $6 billion of bonds this week, about 17% less than the average for this year, and volume is down for the year. In the U.S. junk bond market, issuance for 2022 is the slowest in six years.
In asset-backed securities, two issuers postponed selling bonds late last week, including auto lender World Omni Financial Corp. Overall sales volume is about the same as last year, but some borrowers are clearly thinking twice before borrowing. In the investment-grade corporate bond market, issuance is also on par with last year’s, and this month’s sales have been relatively strong. But companies are increasingly standing down when yields jump. On Tuesday, at least three borrowers decided against announcing transactions.
The hesitation comes as the Fed is widely expected to start hiking rates when it meets this week. As of Monday, traders in rates markets were pricing in seven hikes this year. Those concerns helped drive yields on the benchmark U.S. 10-year Treasury to 2.13% on Monday, the highest since mid-2019.
Auto-finance company World Omni postponed selling bonds backed by auto-leases on Friday after it had already started the process of marketing the asset-backed securities. It was surprised by how much borrowing rates had jumped.
“The deal is being restructured to accommodate for the recent benchmark interest rate change,” said Eric Gebhard, group vice president of finance and treasurer for JM Family Enterprises, World Omni’s parent company, in an emailed statement. “Our expectation is that the deal will move forward at a later date.”
The nearly $824.5 million ABS started pre-marketing, an early but formal stage of the sales process, on March 8. The collateral backing the bond was auto-lease payments from prime borrowers. World Omni has sold auto loan asset-backeds for more than 20 years, according to data compiled by Bloomberg. The deal arrangers, Bank of America Corp., Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc., and Wells Fargo & Co., all declined comment.
Another ABS deal from “buy now, pay later” lender Affirm Holdings Inc. was also delayed on Friday due to market volatility. The transaction was backed by consumer installment loans.
For asset-backeds, higher benchmark rates can change the economics of a transaction if the gap between the income from the underlying assets and the interest paid on liabilities narrows too much, the investors said, known as “falling excess spread.”
“For ABS as a whole, higher rates are probably affecting excess spreads and overall economics of recent deals,” said Clayton Triick, a senior portfolio manager at Angel Oak Capital Advisors.
This article was provided by Bloomberg News.