High-grade monthly: Banks drive outsized January issuance ahead of rate hikes

Bank of America Corp.'s $9 billion jumbo offering Feb. 1 followed on a near-record torrent of financial-sector deals in January as high-grade issuers barreled into the bond markets in the early sessions of 2022 in the face of mounting borrowing costs. The 2.65% average yield at issuance for new high-grade bonds in January — a high since July 2020 — extended a steady expansion in yield levels from a 1.99% average last July, and it compared with a pandemic-era low at 1.71% in January 2021, according to LCD.

Issuers pressed on despite higher risk premiums and new-issue concessions and the worst-ever return performance for high-grade bonds for a January period. The overall $140 billion of issuance last month ranks second among January totals over the last decade, trailing only the $171 billion in January 2017. Both periods included the highest-ever amounts of financial-sector issuance for a calendar month, including $101.6 billion in 2017 and $100.3 billion in 2022.

All the issuance totals exclude deals from sovereign, supranational, and agency issuers as well as hybrid debt/equity securities, such as preferred stock.

Notably, more than 93% of January issuance was concentrated from Jan. 3-19 before rate volatility at the end of the month choked off large-scale funding efforts until Bank of America jolted the primary back to life at the start of February. Yankee bank issuers accounted for nearly $50 billion of issuance over the first half of the month this year, before the focus shifted to U.S. money-center banks following on a mixed bag of earnings results from the sector for the fourth quarter.

The domestic bank-bond barrage started with deals Jan. 18 for Citigroup Inc. ($5.5 billion) and JPMorgan Chase & Co. ($3.5 billion). Terms for the JPMorgan offering — 2.963% 11-year (non-call 10) notes, priced at T+110 — underscored the rate rise in January. The bank priced a comparable offering of 11-year (non-call 10) notes Nov. 1, 2021, at a lower 2.545% coupon and tighter T+97 reoffer spread.

Similarly, Citigroup on Oct. 27, 2021, completed a $4 billion offering of fixed-to-floating senior notes in three parts, including new 1.281% four-year (non-call three) notes at T+52 and 2.52% 11-year (non-call 10) notes at T+98. The January offering included higher-coupon 2.014% four-year (non-call three) notes at T+67 and 3.057% 11-year (non-call 10) notes at T+118.

The main event came Jan. 19 when The Goldman Sachs Group Inc. completed a $12 billion offering in six parts, alongside a $6 billion, three-part pricing for Morgan Stanley. Among large-scale bond offerings from bank-sector issuers, the new Goldman Sachs offering amount trailed only a $15 billion print for Bank of America and a $13 billion offering for JPMorgan Chase, both completed in April 2021. It also topped its own previous largest offering, a $9 billion placement last October.

The banks are taking bigger bites from the U.S. primary markets as the Federal Reserve gets closer to triggering its first rate increase since December 2018. Prior to the pandemic, no bank issuer had priced an offering larger than Bank of America's $7.6 billion placement in March 2014.

Last year's record-shattering $563 billion of financial-sector issuance, versus $499 billion in 2020 and a pre-pandemic peak of $512 billion in 2017, included unprecedented borrowing from the biggest names. The top four single issuers on the U.S. high-grade market in 2021 were bulge bracket majors, including Goldman Sachs ($42.05 billion), Bank of America ($41.25 billion), JPMorgan Chase ($39.25 billion) and Morgan Stanley ($34.5 billion). Citigroup, with $15.15 billion of prints last year, ranked as the ninth-largest issuer for a second straight year. Again, those totals exclude hybrid deals, including preferred stock.

The latest financial-sector deluge in January helped mask a relative dearth of nonfinancial borrowing ahead of fourth-quarter earnings reports. Deals backing M&A-driven funding efforts were notably sparse, though a continuation of blockbuster announcements — including Microsoft Corp.'s bid to acquire Activision Blizzard Inc. for $68.7 billion in cash — augur larger inputs in the months to come.

More broadly, issuance declined sequentially over the final three quarters of 2021, and issuance prospects for the balance of 2022 are in flux as crosswinds from Fed policy, geopolitical tensions, and pernicious pandemic trends buffet the yield curve. Reflecting both higher yields and wider spreads, the negative 2.90% total return for the S&P U.S. Investment Grade Corporate Bond Index in January marked the worst return performance for investment-grade corporate bonds for a January period, the sixth-worst return for any month since 1994, and the steepest losses since the opening weeks of the pandemic in March 2020.

The price for the S&P investment-grade index tumbled more than 3 percentage points during the month, to 105.15% of par at the Jan. 31 close, from 108.53 on Dec. 31, 2021. The yield to maturity for the index increased 40 basis points over that span, to 2.66%, extending a rise from a pandemic-era low at 1.73% in January 2021 and leaving that metric at its highest level since May 2020. Meanwhile, spreads expanded against the volatile underlying yield curve. The T+99 spread Jan. 31 was wider by roughly 6 bps month over month, while the T+107 level Jan. 28 was the widest reading for the index since November 2020.