Global credit markets have seen one of the most aggressive new issue seasons in recent memory, with overwhelming investor demand all but erasing the traditional new issue premium, according to Bryn Jones, head of fixed income at Rathbones Asset Management.
Despite credit spreads remaining tight, several hundred billion dollars of issuance has been met with strong demand by investors ranging from Asian institutions to US life insurers and Dutch pension funds.
Demand has been reinforced by bond redemptions, tender activity and elevated all-in yields after rates markets rose in 2022.
“Demand for credit this year has been extraordinary,” said Bryn Jones (pictured below). “Even with spreads near their tightest levels, the market has comfortably digested huge volumes of supply. All-in yields remain compelling, and for many asset allocators the Sharpe ratios are still very attractive, particularly for those now reallocating having avoided the rise in rates markets and steepening curves over the last few years.”
Tightening spreads have driven strong early-year performance for funds carrying higher beta exposure, with lower-quality and subordinated debt continuing to outperform.
Jones said his approach has focused on selective risk-taking while consciously reducing exposure to long-dated credit duration.
“We’ve continued to favour BBB-rated credit with maturities under 12 years, where risk-adjusted returns look strongest,” he said. “At the same time, we’ve avoided ultra-long corporate bonds. We don’t think investors are adequately compensated for the duration risk at the long-end, especially if spreads were to widen.”
Rather than adding duration through corporate credit, Jones said any extension of interest rate exposure is better achieved through government and supranational bonds at this stage of the cycle.
Participation in primary markets has also been selective for Jones, with limited sterling issuance and UK financials issuance being priced off the most expensive part of the UK gilt curve.
“In many cases, passives were chasing index-eligible bonds offering little value,” Bryn Jones said. “We preferred to source mispriced bonds in the secondary market and exploit curve inefficiencies.”
Looking ahead, Jones expects issuance to remain elevated throughout the year.
Reduced banking solvency requirements in the UK are likely to reduce financial bond issuance, providing relative support for financial spreads versus corporates.
Globally, however, issuance linked to hyperscalers and asset-backed securities funding data centre expansion is set to grow rapidly, with publicly available data suggesting hundreds of billions of dollars of annual capex.
“This pattern is starting to look uncomfortably similar to the telecoms issuance cycle around the turn of the millennium, when issuance accelerated rapidly to fund capex, ultimately contributing to sector-specific spread widening.” Jones warned.
And he added: “We believe a similar dynamic may emerge in certain technology subsectors this year, particularly as they become a larger weight within major credit indices. In our view, this is likely to result in modest spread widening for those issuers and for passive index‑tracking products with limited flexibility to avoid this issuance.”
Jones said the evolving issuance landscape underscores the advantages of active management in credit markets. “In an environment like this, issuer selection, sector allocation and index awareness really matter,” he said. “Active credit funds are better placed to navigate these pressures and avoid being forced buyers of supply at unattractive levels.”
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