The countdown to the Fed rate cut! Long-term debt of American blue-chip companies becoming a "hot cake"

Investors are scrambling to buy securities that are currently scarce for companies to issue: long-term bonds. The demand for American blue-chip companies' 30-year or longer-term bonds is very strong, with subscription amounts averaging about five times the amount of bonds to be issued. This ratio is higher than any period since 2021. Earlier this week, pharmaceutical company Eli Lilly (LLY.US) only issued $20 billion of 30-year and 40-year bonds, but the subscription amount reached $14.7 billion. Investors are eager to lock in yields of over 5.5%, especially with the Federal Reserve expected to cut interest rates. David Brown, Co-Head of Global Investment Grade Bonds at Neuberger Berman, said, "For a long time, people have not been able to buy high-quality investment grade bonds at close to a 5% rate. People are trying to lock in these rates." Meanwhile, companies are reluctant to take on high interest payments for decades by issuing longer-term bonds, and the lackluster acquisition market is also limiting bond supply. These factors have further fueled the frenzy for existing long-term bonds. Strong demand for long-term corporate bonds The growing demand has narrowed the spreads in the secondary market. By the close of trading on Thursday, the risk premium for 10-year or longer bonds had narrowed by 6 basis points this year, while the risk premiums for short-term and medium-term bonds had only narrowed by 2 basis points. Jiyann Daemi, Head of US Corporate Bond Syndicate at Daiwa Securities, said, "Currently, any longer-term bonds face tremendous excess demand, as investors are motivated to invest in markets with higher interest rates and limited supply." This year, some US companies with long-term borrowing needs are looking to Europe for lower borrowing costs. In February, Johnson & Johnson (JNJ.US) issued 30-year bonds in Europe, but issued only 10-year bonds in the US. In May, Pfizer Inc. (PFE.US) issued 20-year bonds in Europe. According to Bloomberg index, investors are getting a yield of 5.75% for bonds with at least a 10-year term, which is over a percentage point more than the average yield for 10-year bonds. For years, the yield on long-term bonds has been relatively high, but this year's demand is even stronger. Bank of America Corp, citing data from EPFR Global, said that as of the week ending August 6, high-grade bond funds and ETFs had inflows of USD 11.6 billion, the highest level since November 2020. JPMorgan's data shows that this year high-grade bond investors have received interest income of around $465 billion, exceeding any year since 2018, allowing them to reinvest more. Despite strong demand, the supply of long-term bonds is relatively limited. According to Bloomberg compiled data, bonds with terms of 30 years or longer only accounted for 11% of the issuance of high-grade bonds so far this year, lower than 15% last year. Companies are less willing to lock in high rates for long periods as there are fewer large-scale financing for mergers and acquisitions. JPMorgan's data shows that mergers and acquisitions-related financing accounted for 11% of high-grade bond transactions this year, compared to 13% last year. Maureen O'Connor, Global Co-Head of Senior Bond Syndicate at Wells Fargo & Company, expects the supply of M&A-related financing to decrease by around $50 billion by the end of 2025 from her initial forecast earlier this year. Market participants are also betting that the Federal Reserve will implement two 25 basis point rate cuts before the end of the year. This has also stimulated demand for long-term bonds. Brian Kennedy, Portfolio Manager at Loomis Sayles & Co., said, "The demand for investment grade credit seems endless at the moment."