Corporate fundraising in the United States surged in the first half of 2024, but bankers are expressing caution about whether this momentum will continue. The upcoming presidential election and the uncertain timing of interest rate cuts are casting doubts over the stability of the market for the rest of the year.
Fundraising activities in the first half of 2024 saw substantial growth, with borrowing in high-grade and junk-rated debt markets rising by almost 50 percent to $1.3 trillion, according to PitchBook LCD. Additionally, initial public offerings (IPOs) increased by 80 percent, totaling nearly $20 billion, as reported by Dealogic.
However, some bankers believe that a significant portion of this activity was driven by companies accelerating their financing efforts to avoid potential volatility later in the year. Richard Zogheb, Citigroup’s head of global debt capital markets, noted that while current activity levels are high, they may not be sustained due to ongoing inflation, delayed rate cuts, and election uncertainties.
“We’re going to be chasing anything and everything [in terms of deals] that we think has any chance of getting across the finish line,” Zogheb said.
Mark Lynagh, global head of investment grade finance at BNP Paribas, also expressed a similar sentiment. He mentioned that while there will be “good windows of activity” in the second half, overall volumes are expected to be lower. Nonetheless, he added, “I don’t think things are going to stop, absolutely not.”
The public credit and equity markets, which are crucial for investment banks’ revenues, experienced a dramatic decline when the Federal Reserve began raising rates in 2022. IPO volumes dropped by more than 90 percent from the previous year, while corporate debt issuance fell by almost 40 percent. Junk-rated bond and loan issuance decreased by nearly 70 percent, though high-grade borrowing was more resilient due to more consistent funding access.
The rebound in borrowing this year has been bolstered by strong investor demand, enabling companies to secure funds at relatively low premiums over benchmark government bonds. This demand has persisted even as the Fed maintained its benchmark interest rate at a 23-year high. Investors have been eager to lock in yields before expected rate cuts by the central bank later this year.
Recent high-grade bond deals include a $10 billion sale by Home Depot to fund its acquisition of building products distributor SRS Distribution and a $15 billion issuance by pharmaceutical company AbbVie in February to finance its acquisitions of ImmunoGen and Cerevel.
In contrast, much of the recent issuance in low-grade debt markets has focused on refinancing existing debt rather than new borrowing for mergers and acquisitions. Zogheb highlighted that although activity levels are higher compared to the very low periods of 2022 and 2023, they are still not meeting the desired volume.
In equity markets, high-profile deals from fast-growing tech companies have been rare. However, there has been a steady flow of share sales, including billion-dollar offerings from cruise operator Viking, Arc’teryx owner Amer Sports, and safety testing group UL Solutions. Follow-on share sales by listed companies increased by almost 40 percent in the first half to $75 billion compared to the previous year, according to Dealogic.
Banks have earned approximately $3.8 billion from US equity deals so far this year. If this rate continues, full-year revenues could surpass pre-pandemic averages. Jesse Mark, global head of equity capital markets at Jefferies, noted that the overall fee pools are exceeding expectations set at the beginning of 2024.
However, bankers caution that recent volumes have been bolstered by companies rushing to complete deals early. The second half of the year is expected to start strongly, with warehouse operator Lineage set to list in July in what will be the largest IPO of the year to date. Mark expects a busy period of follow-on equity sales starting in mid-July after companies report their second-quarter earnings. Bankers are also hopeful for several listings in September, a traditionally active time for IPOs.
Nevertheless, the November election is likely to shorten the window for both IPOs and follow-on sales. Significant fluctuations in market expectations regarding the timing and speed of Fed rate cuts have made it difficult for IPO candidates to confidently forecast their future earnings.
“One thing we do know is the election will be distracting,” said Jill Ford, Wells Fargo’s co-head of equity capital markets. She anticipates some IPOs in September but expects many companies to wait until early next year.
Looking further ahead, some bankers are already focusing on 2025 for a return to a more normalized IPO market. A senior IPO banker at a major Wall Street firm noted that while progress has been made, the market is not yet back to normal levels, and it may take until next year to reach that point.
While US corporate fundraising has experienced a significant rebound in the first half of 2024, the outlook for the remainder of the year remains uncertain. The presidential election and interest rate decisions will be crucial factors in determining the sustainability of this recovery.
China’s Central Bank to Intervene in Bond Market Amid Low Borrowing Costs
China’s central bank has announced plans to directly intervene in the bond market, reflecting growing concerns among officials about a rally that has pushed borrowing costs to their lowest level in two decades. The People’s Bank of China (PBoC) declared on Monday that it would “borrow sovereign bonds from primary traders in the open market in the near future.”
This decision comes after “prudent observation and evaluations of current market situations,” with the aim to “maintain the stable operation of the bond market.” The announcement coincided with a decline in the yield on China’s onshore 10-year government bond by two basis points to 2.18 percent, the lowest since Bloomberg began tracking the data in 2002.
Investors have been flocking to these bonds, seeking safe assets amid economic uncertainty. Experts suggest that the PBoC’s move is intended to cool the market rally by selling bonds to reduce demand. Zhang Ming, a senior fellow and deputy director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, noted that the PBoC would become a regular and active trader in the secondary market of sovereign bonds. He added that the Chinese government plans to significantly increase the sale of its sovereign bonds in the coming years.
Following the PBoC’s statement, yields on China’s 10- and 30-year government bonds rose to 2.2 percent and 2.4 percent respectively, as bond prices fell. Chinese regulators are concerned about the intense demand for sovereign bonds, with the PBoC repeatedly warning that excessive market appetite could lead to a crisis similar to the collapse of Silicon Valley Bank in the US last year.
Ming Ming, chief economist at Citic Securities, explained that the central bank’s announcement indicates a forthcoming sale of sovereign bonds on the open market. “A central bank sale would help stabilize the yield level at the longer end of the curve and prevent rate risks,” he said.
Two weeks ago, PBoC Governor Pan Gongsheng spoke at a forum, indicating that the bank was prepared to trade sovereign bonds in the secondary market. He emphasized that this move should not be equated with quantitative easing. “Including government bond buying and selling into the monetary policy toolbox doesn’t mean we’ll do quantitative easing,” Pan clarified. “It is meant to be a channel for base money injection and a tool for liquidity management.”
PBoC Plans Direct Market Action to Stabilize Bond Yields
This planned intervention by the PBoC highlights a strategic approach to managing the bond market and ensuring financial stability. By acting as a regular participant in the secondary market, the PBoC aims to mitigate risks associated with excessive bond purchases and stabilize yields. This move is crucial for maintaining a balanced financial environment, particularly in a period of economic uncertainty and low borrowing costs.
The central bank’s proactive measures reflect a broader strategy to manage liquidity and control market fluctuations. By borrowing sovereign bonds from primary traders and participating actively in the market, the PBoC intends to influence supply and demand dynamics, thereby stabilizing bond yields. This approach aims to prevent sharp market movements that could destabilize the financial system.
The increase in bond sales by the Chinese government is part of a long-term plan to enhance the bond market’s role in the country’s financial system. As the government ramps up its bond issuance, the PBoC’s involvement will be critical in managing the market’s response and ensuring that yields remain stable.
The PBoC’s intervention also underscores the importance of maintaining investor confidence in China’s bond market. By actively managing bond supply and demand, the central bank aims to reassure investors and prevent the kind of market panic that can lead to financial crises. This strategic management is essential for sustaining economic stability and supporting the government’s broader financial objectives.
