US-marketed floating-rate bonds this YTD almost doubled in volume from full-year 2016, even as fixed-rate issuance fell.
US IG floating-rate bonds flying high
Investment-grade (IG) floating-rate bonds have surged to a 10-year high, largely as a result of the current rising-interest-rate environment. So far in 2017, US floating-rate bond issuance totaled $192.7bn—already the second highest on record after full-year 2007 ($249.6bn). This year’s figure also marked a 97% increase from $97.8bn in full-year 2016. Activity pressed forward as well with 394 deals priced this year so far, a 91% increase from last year’s 206 priced deals.
Unsteady volume for fixed-rate bonds
After 3 years of growth, US IG fixed-rate bond volume decreased to $1.1bn so far this year. With only a month of the year left, volume for such deals is still 13% behind last year’s $1.2bn. 2017 has become the year of rising interest rates; the US Federal Reserve has been steadily increasing the rate for Fed funds from 0.25% in December 2015 to 1.25%, where it has been since June 2017.
In the current environment, fixed-rate bonds tend to decrease in value when interest rates rise, becoming less attractive to investors. Floating-rate debt, on the other hand, is tied to a benchmark such as Libor—which allows a floater’s coupon rate to accompany changes in the benchmark rate, ensuring its market value during the life of the bond.
Rising rates beyond the US
Will this rate hiking cycle continue? Some market observers expect the Federal Reserve to increase the Fed fund rate one more time by year-end. In early November, the Bank of England increased their benchmark rate from 0.25% to 0.5% for the first time in 10 years. Recently, the Bank of Korea also increased interest rates, marking its first rate hike in 6 years. With this year’s strong showing of floating-rate bond volume in the US-marketed space, it will be interesting to see if a similar trend occurs in international bond markets as rates continue to rise. At least for 2017, the floaters have come in full force.
–Written by Kenneth Lopez, Dealogic Research
Data source: Dealogic, FedPrimeRate.com (Fed Fund Rate History), as of November 30, 2017