Companies are racking up more debt and are on a stock-buyback spree as recession fears fade
- Companies are issuing more debt as recession fears fade, Bank of America said.
- Around $23 billion of investment grade corporate bonds have been issued already in December.
Companies are issuing more debt and buying back their stock at a faster pace as they put fears of a deep recession in the rear view, according to Bank of America.
More US firms have been re-leveraging over the past few months, the bank's credit strategists said, which means companies are issuing more bonds and tacking fresh debt onto their balance sheets.
Around $23 billion of US investment grade bonds have been issued already in December, the bank said, and dealer inventories of US investment grade bonds rose to $8 billion on Monday, according to TRACE data cited by Bank of America, up from just a $5.7 billion inventory available on November 29.
Meanwhile, investment grade non-financial firms, excluding mega-cap tech firms, spent a total $87 billion on stock buybacks over the last quarter. That's up $4 billion from the second quarter of this year, the largest increase in stock buybacks seen since late 2021, the bank said.
Adding new debt is the opposite of what investment grade companies were doing last year, when firms were de-leveraging their balance sheets at the fastest pace since the 2008 recession as rates rose and forecasters were calling for a hard-landing recession scenario.
That's largely due to fading recession fears into 2024, as well as expectations for lower interest rates in the economy. The ICE BofA US Corporate Index, which tracks the effective yield of investment grade bonds, ticked lower to 5.57% on Monday, down from a peak of 6.44% earlier this year.
"Recession fears due to the Fed hiking cycle were likely the biggest reason for the first IG de-leveraging cycle in 2022-2023 since the Global Financial Crisis," strategists said in a note on Tuesday. "With markets now pricing in a higher chance of a soft-landing – most recently supported by the strong November Payrolls report on Friday – the need to protect balance sheets is less urgent."
Some experts still say that the risk of a downturn looms over the economy, and if the US manages to avoid a steep downturn, that could mean interest rates will stay higher-for-longer than markets are expecting.