Investors are scrambling to purchase securities that few companies are currently willing to issue: long-term bonds. Demand for 30-year or longer maturity bonds from US blue-chip companies is exceptionally strong, with subscription amounts averaging approximately five times the amount of bonds to be issued. This ratio is higher than any period since 2021.
Earlier this week, pharmaceutical company Eli Lilly (LLY.US) issued only $2 billion in 30-year and 40-year bonds, yet received subscriptions totaling $14.7 billion. Investors are eager to lock in yields above 5.5%, particularly as the Federal Reserve prepares to cut interest rates.
"For a long time, people haven't been able to buy high-quality investment-grade bonds at rates close to 5%. People are trying to lock in these rates," said David Brown, Global Co-Head of Investment Grade Bonds at Neuberger Berman.
Meanwhile, corporations are reluctant to commit to decades of high interest payments by issuing longer-term bonds, while sluggish merger and acquisition markets have also limited bond supply. These factors have further fueled the frenzy for existing long-term bonds.
**Strong Demand for Long-Term Corporate Bonds**
The surge in demand has caused spreads in the secondary market to tighten. As of Thursday's close, risk premiums for bonds with 10-year or longer maturities have narrowed by 6 basis points this year, while risk premiums for short-term and medium-term bonds have only narrowed by 2 basis points.
"Currently, any longer-duration bonds are facing enormous, excess demand because investors have incentives to put money into areas of the market where rates are higher and supply is constrained," said Jiyann Daemi, Head of US Corporate Bond Syndicate at TD Securities.
This year, some US companies with long-term borrowing needs have turned their attention to Europe, where borrowing costs are lower. In February, Johnson & Johnson (JNJ.US) issued 30-year bonds in Europe but limited its US bond issuance to 10-year terms. In May, Pfizer (PFE.US) issued 20-year bonds in Europe.
Bloomberg indices show that for bonds with at least 10-year maturities, investors are receiving yields of 5.75%, more than one percentage point higher than the average yield on 10-year bonds. While long-term bonds have maintained relatively high yields for years, this year's demand has been particularly robust.
Bank of America, citing EPFR Global data, reported that high-grade bond funds and ETFs saw inflows of $11.6 billion in the week ending August 6, the highest level since November 2020. JPMorgan data shows that interest income earned by high-grade bond investors this year (approximately $465 billion) exceeds any year since 2018, providing them with more capital for reinvestment.
Despite strong demand, the supply of long-term bonds remains relatively limited. According to Bloomberg-compiled data, bonds with 30-year or longer maturities have accounted for only 11% of high-grade bond issuances year-to-date, down from 15% last year.
Corporations are reluctant to lock in high rates for extended periods as they did in recent years, partly due to fewer merger and acquisition deals requiring large-scale financing. JPMorgan data shows that M&A-related financing has accounted for 11% of high-grade bond transactions year-to-date, compared to 13% last year.
Maureen O'Connor, Global Head of Senior Debt Syndicate at Wells Fargo, expects M&A-related financing supply to be approximately $50 billion lower by the end of 2025 than she anticipated at the beginning of this year.
Market participants are also betting that the Federal Reserve will implement two 25-basis-point rate cuts before year-end, further stimulating demand for long-term bonds.
"The demand for investment-grade credit right now seems endless," said Brian Kennedy, Portfolio Manager at Loomis Sayles & Co.