2018: A year of robust supply
The investment grade bond market had another robust year of supply in 2018. This was the fifth year in a row where issuance topped a trillion dollars. 2018 issuance was about 10% off of 2017's record pace, but despite that, it was still a healthy amount at $1.2 trillion.
One of the factors that drove a significant amount of supply this year was debt-financed M&A. That was a big driver of issuance, especially across the consumer retail, healthcare and industrial sectors, with several jumbo bond deals north of $10 billion, and the largest deal of 2018 was CVS Health's $40 billion transaction to fund the Aetna acquisition.
Another driver of issuance in 2018 was companies looking to get out ahead of refinancing needs in a rising rate environment and amidst a choppier market backdrop than we've seen in a while.
While supply was strong in 2018, it was off the record pace of 2017, largely due to US tax reform. Global companies with large off-shore cash balances were able to begin repatriating that off-shore cash, and, as a result, didn't have as large a funding need.
2019: More of the same, with a twist
Some of the factors that influenced the debt capital markets in 2018 will continue to impact the market in 2019. We're expecting to see a continuation of market volatility with more focus on the Fed, uncertainty around rates, the inversion of the yield curve and the concern that we're nearing the end of the business cycle. Issuers will have to navigate good issuance windows in between Fed meetings, data releases, Treasury auctions, all of which will impact borrowing costs and investor sentiment. Issuers will benefit from being nimble in their funding plans to take advantage of strong market windows.
While the M&A financing pipeline is down from past years, we do expect it to remain a key driver of issuance in 2019. There are several deals currently in the pipeline, predominantly in the tech and healthcare sectors.
Another driver of issuance will be the flat yield curve. The cost of extending out the curve is cheaper today than it has been in many years. This could cause issuers to term out commercial paper or bank debt with longer-term debt at no incremental cost.
We expect supply to top a trillion dollars again in 2019 for a sixth year in a row, but it will likely be down slightly from 2018. Global corporates with large off-shore cash balances will continue repatriating money, which could keep them on the sidelines as it did in 2018. Also many issuers who levered up to make acquisitions recently will be focused on deleveraging and may also stay on the sidelines.
One trend we expect to continue is that companies will evaluate issuance opportunities across various markets. US issuers are likely to look to the European markets to lower interest expense, and European and Asian companies are likely to come to the dollar market, given the depth of liquidity here, and the ability to extend duration relative to their home markets.
Barclays is fortunate to have two home markets, one in the US, one in the UK, so we're uniquely positioned to help clients evaluate funding options across the global markets and help them execute in whatever currency makes the most sense for their business.