Companies Are Racing to the US Debt Market — and Here’s Why

(Bloomberg) -- The surge of borrowing in the US corporate debt market, on the surface, looks odd. Despite all the excitement about the Federal Reserve’s long-awaited pivot toward easing monetary policy, it hasn’t done so yet. In fact, its benchmark interest rate is still pinned at a more than two-decade high. But up and down corporate America, at blue-chip businesses and those heavily burdened by debts, executives are turning to Wall Street to borrow cash at a blistering pace. It’s the sort of stampede expected once the central bank is already slashing borrowing costs and actively trying to pump money into the economy. In this case, though, it reflects the swift repricing that’s raced through the markets as traders get ahead of the Fed.

How much are corporations borrowing?

In the week after the Labor Day holiday, Wall Street typically snaps back from its summertime lull. This time, it has been particularly strong. On Tuesday and Wednesday alone, nearly 50 companies sold some $72 billion of new bonds, marking the busiest two days on record. By Thursday, the tally had reached $80 billion. On top of that, at least 27 others launched some $28 billion of deals in the leveraged loan market, where heavily indebted companies frequently turn to raise cash. That corner of Wall Street hadn’t seen so much activity during the first week of September since 2021, when the Fed still had its key rate pinned near zero.

Why are they doing that now?

Borrowing costs are already looking compelling. Markets have grown convinced that the central bank will start moving at an aggressive pace when it meets again in mid-September. As a result, it’s become a sort of self-fulfilling prophecy: Rather than wait, markets have already started pricing that expected path in, fueling a sharp bond-market rally. That’s slashed borrowing costs considerably. By one measure, the rates paid by investment-grade corporate borrowers have tumbled to a 2-year low of around 4.8%, down from as much as 6.4% last October.

Won’t rates get even lower if they wait?

That’s entirely possible. Unlike previous bond rallies, which petered out when the Fed stayed on hold, this one seems on more secure ground, though. Chair Jerome Powell has made it clear that the central bank is poised to start easing policy, worried that the job market could worsen if it waits too long.

Still, there are solid reasons for the corporations not to wait. Bond traders have baked an aggressive series of interest-rate cuts into the market already, anticipating that policymakers will act with the sort of haste that’s usually seen when recessions look virtually inevitable. And even though the job market has softened and there have been signs of slowdown in pockets of the economy, that doesn’t seem the case now. That’s raised the risk that the Fed could disappoint the markets by adopting a more gradual pace. If that happens, bond yields could very well tick back up some — and the window that corporations are seizing on would effectively close.

On top of that, there’s a possibility that the outcome of the presidential election could alter the calculus, as well. Wall Street analysts have warned it could create some volatility, particularly if the outcome is somehow contested. Donald Trump’s potential return to the White House would also raise the specter of higher tariffs and tax cuts — both of which could fan the inflation pressures the Fed has been eager to contain.

Is all this borrowing creating risk?

It doesn’t look that way in any clear-cut fashion. Much of the activity has focused on refinancing, not the sort of piling on of new debt that could be expected to create problems down the road. Some of it has involved pushing out the maturity of a company’s debts, which should address some of the perennial worries that defaults will rise if the economy stalls and they can’t afford to repay what’s owed.

Some of the debt has also been floated to finance previously announced mergers and acquisitions, including from big issuers like AbbVie Inc., Cisco Systems Inc., Home Depot Inc. and Occidental Petroleum Corp. Analysts at JPMorgan Chase & Co. expect high-grade companies to raise an additional $71 billion of debt to help fund M&As by the end of this year, which would push full-year acquisition-related financing to $215 billion for the full year, the highest in six years.

--With assistance from Jessica Nix and Christopher DeReza.