Bank Debt Sales Boost Corporate Bond Market
American banks are overwhelmed with liquidity. So they go into debt.
The six largest U.S. lenders have issued some $ 314 billion in bonds so far this year, already the most for any year since 2008, according to Dealogic.
Since the banks released their third quarter financial results earlier this month, Goldman Sachs Group Inc.,
Morgan Stanley MS 0.11%
and Bank of America Corp.
all had multi-billion dollar bond sales. In April, Bank of America and JPMorgan Chase & Co. achieved the largest sales of bank debt ever.
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Banks are playing a bigger role in propelling the corporate bond market, which has also slowed from the debt boom induced by last year’s pandemic. Financial institutions are the issuers behind more than a third of U.S. grade debt so far this year, according to Dealogic, with the highest share for a year dating back to the dawn of modern mega-banking.
Record debt sales may seem unnecessary as banks are already living up to their liquidity. The largest consumer and commercial banks have collected billions of dollars in deposits since the start of the pandemic.
But deposits are only part of the liability equation of the biggest banks. They are also required to keep a certain portion of their liabilities as long-term debt. Because of this, the ratio of debt to other liabilities can skid when deposits increase as much as they have. Banks are therefore issuing more bonds to overcome regulatory hurdles.
The requirement that long-term debt represent a minimum share of bank liabilities is a consequence of regulation after the 2008-09 financial crisis. The idea is that a layer of long-term debt makes banks less susceptible to panic in short-term funding markets, which was one of the main reasons for Lehman Brothers’ demise.
It also doesn’t hurt that banks that sell debt today are able to lock in low, long-term borrowing costs. This could help increase profits over time if short-term rates rise in the future and lending accelerates.
At the moment, however, the demand for loans is low. During the pandemic, consumers cut spending and received federal stimulus payments, which gave them money to pay off loan balances. This has made it difficult for banks to use the cash that is on their balance sheets. Bank of America, for example, has more than twice as much money in deposits than it has loaned.
Goldman Sachs and Morgan Stanley do not have a large deposit base but sell bonds to support growth. Goldman said in its third quarter results that it had grown its equity and fixed income financing business. Bank of America also issues debt in part to support capital market activity.
Investors, meanwhile, see an opportunity in bank debt. Tom Murphy, senior credit quality manager at Columbia Threadneedle Investments, said he currently enjoys banks and has been involved in some of their debt sales this year.
Bank bonds trade at a higher yield than industrial company bonds with similar ratings, which means Mr. Murphy can earn up to 0.3 percentage point more of return than industrial bonds without more. credit risk.
At the same time, banks stand to benefit if rising inflation continues to push up interest rates. “The macroeconomic environment should be good for these institutions,” said Mr. Murphy.
Bank stocks have also been popular this year. The KBW Nasdaq Bank Index, which measures stocks of the largest banks, rose 45% this year, more than double the gain of the S&P 500. The rally continued this month after the banks announced profit growth across the board for the third quarter.
Write to Ben Eisen at [email protected]
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