Though U.S. corporate bond issuance is on a record pace for the year, Street strategists are showing little concern about this month's supply flood widening spreads. This is primarily because they think issuance will slow down in the second half of the month, which combined withFederal Reserve rate cuts, will keep bonds attractive.
The market appetite for corporate bonds is "a very timely issue at the moment, because we seem to be hitting the peak of supply for the year," saysLouise Purtle, U.S. corporate strategist at Deutsche Bank Alex. Brown. She says over the last 10 years, most new issuance has come in the first half of the year.
However, Purtle says last week's rate cut and the likelihood of further easing is more significant than the amount of new issuance, noting they are largely responsible for a flood of foreign capital into corporates. She also notes that investors will receive some $120 billion from May through August from bond redemptions and coupon payments, most of which will probably go back into the market.
Wei Wang, senior corporate bond strategist at Salomon Smith Barney, expects total issuance for the month to come in just under $60 billion. Total new issuance for the year has been well above historic averages, and he believes current issuance levels are due for a slowdown. If, however, they reach $70 billion, he says, "Spreads will get killed."