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So much for winding down into Christmas, bond markets had an absolute whirlwind final two months of the year! And while government bonds have retrenched somewhat in January, corporate bonds have continued their surge in the new year.
In November the Bloomberg Global Aggregate investment grade bond index had its strongest month since December 2008; generally, it didn’t matter which bond index you used, corporate and government bond returns for the final two months of 2024 weren’t far from double digits. Not only did this mean that some of the earlier 2024 outlooks that came into my inbox were rendered outdated rather swiftly (my sympathies with the authors given the level of detail in them!), but it also left credit markets looking at pretty decent returns for 2023. For instance, the ICE Bank of America Sterling Corporate bond index returned almost 10% for the year.
The drivers of this end of year rally have received plenty of coverage. Briefly, in October the US Treasury market was under pressure as investors fretted that the government was spending more money than bond investors would be willing to buy at auction. As it turned out, the government issued fewer long-dated treasuries than investors were expecting. Meanwhile, alongside the Treasury’s refunding announcement, soft inflation data and signs that the American labour market was cooling in a helpful way fostered optimism regarding a soft landing. Then the US Federal Reserve (Fed) topped it all off with much more dovish commentary than we have seen in some time. In short, rates and credit rallied significantly.
It’s interesting to note, however, that the minutes of the Fed’s December meeting (released in early January) seemed less dovish than Chair Jay Powell came across in the post-meeting press conference, in our opinion. Also, the market moves were likely exacerbated to a degree by the traditionally poor liquidity that surrounds the holiday season.
That no doubt led to the slight reversal in fortunes for government bonds in early 2024. Yields rose as gilts sold off. Yet corporate bonds quickly recovered and outperformed strongly as January progressed.
Investors gobble up issuance
At some point between the turkey and Christmas pudding, my mind had drifted to corporate treasurers and the likely rush of issuance we would see at the start of 2024. I know, I’m a sad guy – but that’s why I’m in this job!
January, commonly, is a heavy month of issuance after a sleepy December – and this year turned out to be no different. Especially given the significant falls in borrowing costs in the fourth quarter, as well as a market over the previous couple of years which has not been particularly straightforward at various times for issuers – trying to price a bond while yields are volatile and rising is a nightmare for companies. With volatility and yields lower, many businesses will be looking to lock in better funding costs in the first few months of 2024. Yet how might this supply be received by investors?
At the back-end of the year, in a strongly performing market, flows were heavily skewed towards buying, so it seemed that new issuance supply would help to alleviate this technical imbalance. On the other hand, given the scale of the late-2023 rally mentioned above, I thought investors might be wary of buying at what could turn out to be high prices.
As it turned out, January supply was slightly less than expected but demand from buyers held firm. Issuers were able to tighten deals significantly from their initial pricing and books were generally heavily oversubscribed.
It seems plausible that investor inflows into credit markets could further help support the positive technical picture in coming months. The significant flows into money markets last year are well documented – a record £4.4 billion was deposited in cash funds according to market plumbing provider Calastone. But with investors now focused very much on the timing of the first Bank of England rate cut rather than how far rate hikes will go – plus the last few months of 2023 creating a stark reminder that rates can drop rapidly as the cycle pivots – we wouldn’t be surprised if any 2024 increases in bond yields are met with inflows into bond funds as investors look to lock in their long-term yields. Especially if inflation continues to drop and the yields on offer – for cash and everything else – fall meaningfully in response.
