Analysis to save debt costs: Corporate hedges may have exacerbated 10-year sell-off.
By Shankar Ramakrishnan and David Barbushia
(Reuters) – A sell-off in U.S. Treasury markets in recent weeks may have been exacerbated by corporate plans to borrow nearly $190 billion in bond markets this month, bankers and analysts said, underscoring risks to markets as it could continue. year.
He said the flow from the corporate to government bond market was caused by many companies short-selling Treasuries ahead of their bond offerings, buying protection against future interest rate hikes, known as pre-exit hedges.
Pressure from Treasury corporate borrowing adds a new dimension to intense market focus on the likely direction of bond yields this year. Rising bond yields influence economic growth and can flow into other assets such as stocks and currencies.
These hedges are basically short trades that profit from rising US government bonds or Treasury yields. Yields move inversely to bond prices. Corporate bonds are valued as a spread, or an additional interest rate, over the yield on Treasury bonds.
So, if the yield rises when the company issues the bond, it pays off the hedge and offsets the interest expense. If production declines, the company may lose money on the hedge.
The market has been rising in the $28 trillion Treasury market since September, as the market gauges growth, inflation, bond supply and the potential impact of President-elect Donald Trump’s policies. This gave them reason to expect that production would increase.
“The hedging of these bond futures has been very strong in the last few weeks,” said Amol Dargalkar, managing partner at Chatham Financial Advisory. Typically, companies bid about half the amount of future bond issuance, he said.
In the first 16 days of January, $127 billion worth of new corporate bonds were issued. Another $63 billion is expected on average for the rest of the month, according to Informa Global Markets data.
On average, syndicated banks are anticipating about $1.65 trillion of new investment-grade bonds in 2025, making it the second most productive year ever for such offerings, according to Informa Global Markets.
Pre-release hedges are often used during periods of volatility in Treasury markets, something many market experts expect will be a feature this year as well, in part because of the uncertainty surrounding Trump’s policies.
HEDGING activity
A pre-release hedge is a transaction between companies and banks and is typically disclosed later, making it impossible to determine the amount of activity.
