Analysis-Deal slump hits US high-grade bond supply, pressures spreads

By Shankar Ramakrishnan and Anirban Sen

NEW YORK (Reuters) – The pipeline for U.S. high-grade company bond issuance to fund mergers has fallen to the bottom ranges in 5 years as President Donald Trump’s commerce warfare deters offers, in what may very well be a boon for debtors however a problem for banks and traders.

Wall Avenue had anticipated the Trump administration’s insurance policies equivalent to deregulation and tax cuts to gasoline a resurgence in deal exercise and add $250 billion to $300 billion of investment-grade bonds to fund it this 12 months, up from $179 billion in 2024, in response to interviews with six debt capital markets bankers.

As an alternative, financial uncertainty attributable to Trump’s insurance policies, particularly the specter of tariffs on U.S. imports, has thrown markets into turmoil, and prompted executives to hit “pause” on offers whereas they await readability. U.S. M&A quantity within the first quarter fell 3%, Dealogic knowledge exhibits.

Meghan Graper, world head of debt capital markets at Barclays, mentioned solely $8 billion of acquisition financing is at present within the pipeline for the market, in contrast with roughly $100 billion on the identical level final 12 months, the bottom since June 2020.

Total, investment-grade bond issuance volumes had been anticipated to common $1.65 trillion in 2025, some $150 billion greater than a 12 months earlier, in response to Informa World Markets.

Daniel Botoff, RBC Capital Markets world head of debt capital markets, mentioned he had anticipated some 20% of issuance volumes this 12 months to comprise M&A financing. “However that expectation is wanting optimistic,” he mentioned.

Some bankers and analysts mentioned the decrease issuance to finance offers might put tightening stress on credit score spreads, the premium over Treasuries that issuers pay to traders.

If the M&A droop continues, specialists mentioned it might additionally hit banks’ backside traces, probably resulting in job losses within the trade.

Daniel Krieter, a strategist at BMO Capital, mentioned he now expects general investment-grade volumes for the 12 months to finish up nearer to $1.5 trillion, the identical as in 2024, the second-busiest 12 months ever for issuance.

However that quantity of issuance will not be sufficient to fulfill traders who’re anticipated to be flush with money.

Traders will get again practically $1 trillion this 12 months – which is unusually excessive – in curiosity funds and as bonds mature. Most of that quantity is anticipated to be reinvested, in response to a JP Morgan analysis notice and analyst estimates.

This can be on prime of the already-persistent investor demand to lock within the excessive yields on the highest-rated bonds earlier than anticipated cuts in U.S. rates of interest this 12 months.

Credit score spreads have tightened practically 6 foundation factors since touching their widest ranges for the 12 months in March when markets turned unstable, in response to ICE BAML knowledge. However at 91 foundation factors, they’re solely 14 foundation factors away from their lowest ranges in over a decade.

With no burst of bond issuance to fund M&A exercise, spreads might stay at these tight ranges or slender additional even when the financial system slows and danger in these bonds will increase.

“Development is sort of sure to gradual because of Trump’s commerce and tariff insurance policies however a recession seems unlikely within the medium time period,” mentioned Edward Marrinan, macro credit score strategist at SMBC Nikko Securities.

“We don’t anticipate credit score spreads to maneuver materially wider from present ranges — except our view on recession adjustments,” mentioned Marrinan.

The comedown in expectations of issuance has been dramatic. At one level within the first quarter it seemed like they had been heading in the right direction with some large offers introduced.

In March, for instance, practically $49 billion was raised by investment-grade firms to fund acquisitions, together with a $26 billion eight-part bond providing by sweet big Mars to finance its $36 billion takeover of Pringles maker Kellanova – the most important M&A financing in two years – and a $10 billion six-part bond providing by design-software maker Synopsys to help its $35 billion buy of Ansys.

However Barclays’ Graper mentioned that pattern has not held up and the pipeline has dried.

Volatility is “placing a dampener on dealmaking exercise with patrons reluctant to pay what sellers need in an unsure macro setting,” mentioned Sandeep Desai, co-head of leveraged debt markets for North America at Deutsche Financial institution.

With a lag between announcement and financing, the absence of an outsized pipeline already in place doesn’t bode properly for the 12 months.

“New M&A that can want financing this 12 months must be struck within the subsequent few months,” mentioned Victor Forte, head of investment-grade capital markets and syndicate at Mizuho. “However that development has been delayed due to the macroeconomic uncertainty.”

(Reporting by Shankar Ramakrishnan and Anirban Sen in New York; Enhancing by Paritosh Bansal and Matthew Lewis)

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