Countdown to the Federal Reserve's interest rate cut! U.S. blue-chip companies' long-term bonds become "hot cakes"

According to the Zhitong Finance APP, investors are rushing to buy securities that very few companies are willing to issue at present: long-term bonds. The demand for 30-year or longer-term bonds from U.S. blue-chip companies is extremely strong, with the subscription amount averaging about 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, but the subscription amount reached as high as $14.7 billion. Investors are eager to lock in yields above 5.5%, especially with the Federal Reserve poised to cut interest rates.

David Brown, co-head of global investment-grade bonds at Neuberger Berman, stated, "For a long time, people have been unable to buy high-quality investment-grade bonds at rates close to 5%. People are trying to lock in these rates."

At the same time, companies are reluctant to take on high-interest payments for decades by issuing longer-term bonds, and the sluggish acquisition market has also limited the supply of bonds. These factors have further fueled the frenzy for existing long-term bonds.

Strong Demand for Long-Term Corporate Bonds

The increase in demand has narrowed the spreads in the secondary market. As of Thursday's close, the risk premium for bonds with a term of 10 years or more has narrowed by 6 basis points this year, while the risk premium for short-term and medium-term bonds has only narrowed by 2 basis points.

Jiyann Daemi, head of U.S. corporate bond syndicate at TD Securities, said, "Currently, any longer-term bonds are facing tremendous, excess demand, as investors are motivated to put money into a market segment with higher rates and limited supply."

This year, some U.S. 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, while the bonds issued in the U.S. had a term of only 10 years. In May, Pfizer (PFE.US) issued 20-year bonds in Europe.

Bloomberg indices show that for bonds with a term of at least 10 years, investors are receiving yields of 5.75%, which is more than one percentage point higher than the average yield for 10-year bonds. Long-term bond yields have been relatively high for years, but demand has been even stronger this year.

Bank of America cited EPFR Global data indicating that for the week ending August 6, inflows into high-rated bond funds and ETFs reached $11.6 billion, the highest level since November 2020. Data from JP Morgan shows that this year, high-rated bond investors have earned interest income (about $465 billion) exceeding any year since 2018. This has provided them with more funds for reinvestment.

Despite the strong demand, the supply of long-term bonds is relatively limited. According to Bloomberg compiled data, bonds with a term of 30 years or more accounted for only 11% of high-rated bond issuance so far this year, down from 15% last year Companies are reluctant to lock in high interest rates for the long term as they did in previous years, partly because there are fewer large-scale financing mergers and acquisitions (M&A) deals.

According to JP Morgan, M&A-related financing has accounted for 11% of high-rated bond transactions this year, down from 13% last year. Maureen O'Connor, the global head of senior bond syndicate at Wells Fargo, expects that by the end of 2025, the supply of M&A-related financing will decrease by about $50 billion compared to her expectations earlier this year.

Market participants are also betting that the Federal Reserve will implement two 25 basis point rate cuts before the end of the year. This has also stimulated demand for long-term bonds.

Brian Kennedy, a portfolio manager at Loomis Sayles & Co., stated, "The current demand for investment-grade credit seems endless."