US companies and governments are hesitant to sell bonds now

Recent spikes in bond yields have companies and governments reluctant to borrow across a wide range of U.S. debt markets, signaling that expected Federal Reserve rate hikes and fears of stagflation are already slowing the flow of credit across the country. the economy.

State and local governments are only expected to sell $6 billion in bonds this week, about 17% below this year’s average, and volume is down for the year. In the US junk bond market, issuance for 2022 is the slowest in six years.

In asset-backed securities, two issuers postponed bond sales until late last week, including car lender World Omni Financial Corp. Overall sales volume is about the same as last year, but some borrowers are clearly thinking twice before borrowing. In the investment grade corporate bond market, issuance is also comparable to last year, and sales this month have been relatively strong. But companies increasingly retreat when yields rise. On Tuesday, at least three borrowers decided not to announce transactions.

The hesitation comes as the Fed is expected to start raising rates at its meeting this week. On Monday, traders in the rates markets were expecting seven hikes this year. Those worries helped push yields on the benchmark 10-year U.S. Treasury note to 2.13% on Monday, the highest since mid-2019.

On Friday, auto finance firm World Omni postponed the sale of bonds backed by auto leases after it had already begun the process of marketing asset-backed securities. He was surprised by the magnitude of the rise in borrowing rates.

“The agreement is being restructured to take into account the recent change in the benchmark interest rate,” said Eric Gebhard, group vice president of finance and treasurer of JM Family Enterprises, the parent company of World Omni, in an emailed statement. “We expect the deal to progress at a later date.”

The nearly $824.5 million ABS began premarketing, an early but formal step in the sales process, on March 8. The collateral backing the obligation was the principal borrowers’ automatic lease payments. World Omni has been selling asset-backed auto loans for more than 20 years, according to data compiled by Bloomberg. The arrangers of the deal, Bank of America Corp., Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc. and Wells Fargo & Co., all declined to comment.

Another ABS deal from “buy now, pay later” lender Affirm Holdings Inc. was also delayed on Friday due to market volatility. The transaction was backed by consumer installment loans.

For asset-backed assets, higher benchmark rates can alter the economics of a transaction if the gap between income from underlying assets and interest paid on liabilities narrows too much, investors said. , a so-called “falling excess spread”.

“For ABS as a whole, higher rates likely affect excess spreads and the overall economics of recent trades,” said Clayton Triick, senior portfolio manager at Angel Oak Capital Advisors.

This article was provided by Bloomberg News.

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