Investment grade fixed income supply is off to a hot start this year. We see the headlines, and while it’s true that corporate borrowing has kicked off 2021 at a torrid pace, we still expect this year to be one of mean reversion. As for the hefty calendar, companies have clearly pulled forward issuance. We can attribute this largely to rising rates, increased capital investment as the economy reopens, and some M&A to boot. 2020 was a monumental year on the supply front for a host of well-documented reasons relating to the COVID 19 pandemic. Despite the early fireworks thus far, we still anticipate that 2021 issuance will return to “normal” levels.
With March behind us, we can reflect on the month that was responsible for more than $200 billion in issuance. This was the largest gross supply month on record, sans only March/April/May of 2020, which were skewed by the reopening of credit markets post the COVID-induced selloff. We saw about a 70/30 split for industrials/financials this time around. The large transactions were led by issuance pertaining to the 5G spectrum auctions. Verizon printed $25 billion and AT&T $6 billion. It’s a reality that M&A-related issuance has perked up to start 2021, matching 2019 levels. However, volume remains far below the year-to-date levels of ‘15, ‘16 and ‘18.
Lost in the deluge of new issuance are redemptions. Redemptions totaled about $140 billion in March counting maturities and optional calls/tenders, etc. The market finished with roughly $60 billion in net supply, a far more manageable number in comparison to the $200 billion headline. Looking forward, preliminary April estimates have us expecting about $130 billion in redemptions. This contrasts with an expected calendar of $100 billion, resulting in a potential negative $30 billion net supply number. While April is an abnormal redemption month by historical standards, it is months like these that can flip the moderate supply headwind we’ve experienced for most of this year into a strong tailwind.
Spreads have shown their resiliency to 2021’s unexpected calendar, among other topical issues such as rising rates and challenging valuations. No more evidence is needed than a snapshot of the credit index, which now sits back at year-to-date tights. The simple math holds that demand continues to outstrip supply, a phenomenon that we expect to persist for the near to medium term.