Monday Musings: January 10, 2022

Jan 10, 2022

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Public Trust Credit Team
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2022 is off to a strong start for investment-grade corporate debt issuance

Spread across 40 total issuers, $62.4 billion of IG corporate debt has been issued so far in 2022. The entirety of last week’s issuance was distributed in the first four days of the week with no issuance coming to market on Friday. IG issuers from our approved universe were among those in the new issue market last week. We participated in the Caterpillar Inc. new issue where Caterpillar priced the sole $1.0+ billion 2-year bonds with the remaining $1.0+ billion par bonds all having three-year maturities. We expect issuance to remain robust through the first quarter until financial conditions begin to tighten.

Investment-grade M&A announcements remain high ahead of potential rate increases

December 2021 saw the highest volume of investment-grade (IG) M&A deal announcements since June 2019. We expect that the potential for several rate hikes this year will keep M&A announcements high as companies try to get any debt funding in before the rate increases. While most of the announced transaction volume was tertiary or lower-rated than our approved universe, there were some notable names and prices. Oracle Corp. announced a $28 billion deal for Cerner Corp.; Conoco Phillips announced it would buy Shell’s Permian basin business for $9.5 billion; and Discovery Inc. announced the purchase of Warner Media for a whopping $43 billion, signaling that even if debt is cheap, company valuations remain expensive.

The equities market is struggling to see the forest for the trees

Thus far in 2022, a great number of threats have roiled the equities markets including inflation readings that are dramatically higher than recent history and concerns of three to four rate increases as well as with the Fed’s tapering. Outside of monetary policies, there are threats related to rising COVID-19 infections and the current quasi-quarantine. Not to be outdone, international macroeconomic and geopolitical risks are frightening market participants. Will there be a greater slowdown in the Chinese economy? Will Russia invade Ukraine? How will China deal with Taiwan? While these are all serious concerns, it is worth noting that this year will be the first experience of hawkish Fed policy for investors who came of age after the early 1980s, and geopolitical risks are always a component of the market speculation. 

In the coming year, we expect that the equities markets will continue to swing around with Fed rate hikes and, possibly, COVID concerns but only in the equities markets. Many equities market participants thrive on wild swings. Fortunately, the investment-grade, fixed-income market is inherently less volatile and slower moving. At Public Trust, we seek to ensure that underlying credit risk is acceptable for public funds. Regardless of the headlines and the noise from equities, we will continue to analyze credit risk to find meaningful data points.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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