"Better to Borrow First! Fearing the Tailwind of the U.S. Treasury Tornado, American Companies Raised $120 Billion in May, Double the Amount from the Same Period Last Year"

Recently, there has been a lot of discussion about whether the United States will default. However, as reported earlier, the probability of a U.S. debt default is very low. Even if Congress fails to reach an agreement before June, there are other means to issue new debt. Rather than worrying about default, what we should really pay attention to is how various market forces are responding, such as the record-high volume of corporate bond issuance in the United States this month.

U.S. companies with higher credit ratings are rushing to issue bonds to hedge against risks associated with the debt ceiling, completing financing ahead of time to prevent future market turmoil.

According to data from Dealogic, reputable companies have issued approximately $112 billion in bonds in May, more than triple the amount from the previous month and about 2.5 times higher than the $46 billion issued in the same period last year. Fueled by the borrowing spree caused by ultra-low rates until 2020, May 2023 saw the highest monthly corporate bond issuance in seven years.

Banks specializing in bonds state that the current market environment is relatively stable, prompting companies to secure loans before any potential disruption caused by the U.S. government's cash shortage. Such a situation could have a chain effect on global asset prices.

Citigroup's global head of bond capital markets, Richard Zoghen, remarked:

Frankly, the pace of bond issuance is increasing. These early transactions reflect companies' mindset: "Let's take advantage of the current stable market and avoid the absurdity of the debt ceiling drama."

In addition to the debt ceiling, these companies are also concerned about potential future economic downturns.

The Federal Reserve raised interest rates from 0-0.25% to 5-5.25% within 14 months, and due to the lag in monetary policy, companies aim to complete financing in advance to mitigate subsequent risks.

While there is a general expectation that the government will eventually reach an agreement, the deadlock in bipartisan negotiations may affect more trading activities, particularly in the U.S. Treasury market, considered one of the safest collateral and most liquid markets. Any delayed payments could impact the prices of many other assets.

On the other hand, the issuance of bonds by lower-rated companies is not as high this month. Analysts point out that these companies are more concerned with credit conditions and risk appetite rather than factors like the debt ceiling.

Earlier, U.S. Treasury Secretary Yellen mentioned a possible default as early as June 1st. In that case, tens of millions of government employees and recipients of welfare benefits and subsidies could face delayed payments, which would also significantly impact financial markets.

Despite the low probability of default, everyone is taking precautions to avoid the risk in case of default. For instance, stablecoin issuer Circle has divested short-term bonds maturing after June and increased overnight repurchase agreements by $8.7 billion in its portfolio.

More details: Circle abandons U.S. bonds in favor of repurchase agreements - Is Repo a good idea?