Issuance from utility companies has also surged amid capital expenditures to support power demand from data centers and electrification. Offerings from that sector have risen 18% this year compared with the same period in 2023 (as of October 10). “There’s no question that we’ve seen a huge uptick in capex from the utility sector, and a big way in which the utility sector will fund that capex is through debt issuance, Sales says.”
Money may flow from short-term debt to longer-term bonds
As the Fed lowers interest rates, reducing the yields on shorter-maturity debt, money is poised to flow increasingly into longer maturity investment-grade bonds, Sales says. Many investors have been able to buy short-term Treasury bills yielding more than 5%, but that yield is falling.
“I would expect that money will migrate away from high yielding T-Bills and into the investment-grade asset class,” Sales says. “That’s something we are in the early stages of now, and that’s a theme we expect will continue over the next handful of months and quarters as the Fed continues the cutting cycle.”
When it comes to the economy, investors’ focus has moved from inflation, which is cooling, to the outlook for growth. Economists in Goldman Sachs Research recently lowered their probability forecast for a US recession in the next 12 months to 15%.
US GDP growth is supporting corporate bonds
And as rates fall, investors are snapping up debt with higher yields, or coupons. “If the Fed is going to be cutting, if we’ve hit a ceiling in terms of interest rates, investors want to lock in coupons for as long as they can,” Sales says. “Demand in the long end of our investment-grade market has been as strong as we’ve seen at any point over the last handful of years.”
Put another way, growth is a primary reason the $1.4 trillion of corporate bonds sales outpaced expectations this year. “What you are seeing, plain and simple, is growth,” he says. “You’re seeing growth in the economy. You’re seeing growth in corporate America. You’re seeing growth of the balance sheet. And as companies grow, they issue debt to finance that growth.”
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Source: goldmansachs.com
