itstargetnews
By Shankar Ramakrishnan and Davide Barbuscia
(Reuters) – A sell-off in U.S. Treasury markets in recent weeks was likely worsened by corporate plans to borrow nearly $190 billion in the bond market this month, bankers and analysts said, highlighting a risk to the markets that this is likely to persist. year
The spillover from the corporate market to the government bond market occurred when many companies bought protection against future interest rate increases, called pre-issue hedging, by selling short Treasuries ahead of their bond offerings, said these people.
Pressure on Treasury yields from corporate debt is adding a new dimension to intense market focus on the likely path of bond yields this year. Rising bond yields can have a dampening effect on economic growth and spill over into other assets such as stocks and currencies.
These hedges are essentially a bet against US government bonds, or a short trade that benefits if Treasury yields rise. Yields move inversely to bond prices. Corporate bonds are priced as a spread, or additional interest rate, over the yield on Treasuries.
Therefore, if yields rise at the time the company issues its bond, the hedge would pay and offset its interest costs. The company can also lose money on the hedge if yields fall.
Yields have risen in the $28 trillion Treasury market since September as the market factored in growth expectations, inflation, bond supply and the potential impact of President-elect Donald Trump’s policies trump This gave them reason to expect yields to continue rising.
Amol Dhargalkar, managing partner at advisory firm Chatham Financial, said “the coverage of these future bond issues has been intense in recent weeks.” Typically, companies cover about half the size of a future bond issue, he said.
The first 16 days of January produced $127 billion worth of new corporate bonds. Another $63 billion on average is expected to price through the rest of the month, according to data from Informa Global Markets.
Overall, syndicated bankers, on average, expect about $1.65 trillion of new investment-grade bonds in 2025, making it the second most prolific year on record for such deals, according to Informa Global Markets.
Pre-issue hedges tend to be used more frequently during periods of volatility in Treasury markets, which many market experts expect will also be a feature this year, in part due to policy uncertainty from Trump
HEDGING ACTIVITY
Pre-issuance hedges are made as transactions between companies and their banks and are usually disclosed later, making it impossible to know the extent of the activity.
