The top banks on Wall Street likely to invest in corporate bonds

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After reporting quarterly results, Wall Street’s top banks are anticipated to attack the corporate bond market to raise cash before the Federal Reserve raises borrowing costs.

JPMorgan Chase & Co. credit research analysts Kabir Caprihan and Nikita Dyatlov expect that big banks will borrow a total of $24 billion to $32 billion following their earnings announcements.

In a note published on Tuesday, the analysts stated that they believe the bias is to the upside and that they will not be surprised if they see closer to $35-$38 billion. Even if banks decide to sell bonds next week, due to Martin Luther King Jr. Day on Monday and an earnings blackout period, issuance is likely to be lower.

Next week, United Airlines Holdings Inc., American Airlines Group Inc., and Netflix Inc. are expected to release earnings, which might affect bond prices.

According to Bloomberg Intelligence credit analysts Stephen Flynn and Suborna Panja, Netflix is likely to become a rising star this year, with around $16 billion equivalent of bonds qualifying for Bloomberg’s high-grade indexes.

Less risky bets

As investors become more concerned about rising yields, which may wreak havoc on longer-term bonds, they are turning to shorter-term bonds. As of Thursday, 41 percent of investment-grade issuance was in the 10-year or longer part of the curve, compared to around 48 percent in 2021 and 58 percent in 2020.

Shorter-dated credit provides a natural buffer against inflation, increasing rates, and potentially deteriorating credit fundamentals, according to Hunter Hayes, senior vice president, and portfolio manager of Intrepid Capital Management’s Intrepid Income Fund. According to Hayes, both investment-grade and high-yield bonds have the potential to mature in the next several years.

According to Barclays Plc strategists Bradley Rogoff and Jeff Darfus, lower-rated CCC debt is also appealing. In a rising-rate environment, lower-rated junk bonds perform better than higher-rated peers due to their shorter-term and lower credit-specific risk, which makes them less connected to interest rates.

While year-to-date moves have benefitted CCCs, they noted in a letter Friday that they believe there are still some appealing CCC chances.

In the meantime, US leveraged loans have been on fire so far this year, with investors flocking to the asset class as a hedge against increasing interest rates and corporations keen to present deals to those interested buyers.

At least ten borrowers, including infrastructure software giant Quest Software Inc., which is marketing $3.6 billion in loans, have commitments due next week. The two-part deal is divided into single B and CCC-rated tranches that will be used to fund Clearlake Capital Group’s acquisition.

According to Matthew Mish, head of credit strategy at UBS Group AG, traders should keep an eye on low-rated tech deals in the future. He claims there is difficulty in sectors of the leveraged loan industry where low-grade borrowers are plentiful.

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