For corporate treasurers, 2022 in the bond market has been a year of vanishing choices. An inverted euro interest rate curve, presaging a deeper recession than expected, suggests 2023 will be just as awkward.
For years, investment grade companies have enjoyed an almost permanently welcoming bond market. It certainly helped to have a price-insensitive buyer with a monstrous appetite gobbling up deals, in the form of the European Central Bank.
This came to an abrupt halt in February, when Russia invaded Ukraine. To add more stress, in the summer the ECB closed its wallet. Suddenly, issuers had to wait on the sidelines for the right time to come to the market. Issuance windows could be short and brutally sharp.
One treasurer said he had to wait until October to bring his first deal of the year — and if it had come a day later, it would probably have failed.
The mood has lifted — or at least shifted — a bit since the Federal Reserve seemed to begin winning the battle against inflation in October.
Now, the stress for companies is less about when to print debt, but how.
The Bund yield curve is deeply inverted. On Thursday, the two year yielded 2.51%, the 10 year 2.32%.
Inverted rates curves are seen as a reliable predictor of recession, as investors are betting central banks will have to cut rates before long.
For corporate issuers, this means the short end of the curve is suddenly looking expensive.
Unfortunately, they cannot just flock to the long end. Far too many investors are still on their guard for inflation to be worse than expected. A further leg up in interest rate expectations would force the long end to swing much wider.
That leaves companies with a pricey short end and long end that is unappealing to investors. Deals will be forced into the belly of the curve.
This does not have to be all bad — five to eight years is a sweet spot for many treasurers’ issuance plans. But it means again a lack of choice for corporate borrowers.
If the signs for 2023 are anything to go by, corporate funding officials are facing another frustrating year.