Corporate bond issuance off to a bang in September

Corporate borrowing is off to the races.

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Companies wasted no time going back to the borrowing trough after the long Labor Day weekend.

U.S. investment-grade companies already borrowed $46.7 billion in the bond market this month through Wednesday, a single day that accounted for $21.3 billion of the total, according to BofA Global Research.

Notable among the week’s deluge was a debut $1 billion green bond issued by JP Morgan Chase & Co.
putting it alongside other major corporations from Google parent Alphabet


to Visa Inc.
which in recent weeks have raced to borrow with do-good purposes.

September often can be a busy month for corporate borrowing, as companies focus on the remaining weeks left in the year to lock in optimal financing — meaning before Thanksgiving, when the typical year-end lull begins to take hold.

Here’s a look at how September bond issuance stacked up over the past five years:

The pandemic has made this year anything but typical, including with a record $1.5 trillion already borrowed by investment-grade companies so far in 2020 to help fund their operations through the year’s end.

Many highly rated businesses borrowed fresh mounds of debt at lower rates than ever before, even though they are now carrying record levels of leverage.

Read: U.S. corporate debt soars to record $10.5 trillion

However, with the Federal Reserve’s unprecedented pandemic support, there’s little reason to think big businesses have had enough of today’s ultra-low borrowing rates.

“It’s a very busy September,” said Wendy Wyatt, a portfolio manager at DuPont Capital, of investment-grade bond supply. While she doesn’t expect to see the same eye-popping borrowing boom as in March, April and May, when companies were panic-borrowing, Wyatt has been encouraged by the recent trend where bond issuance has been used by more companies to kick their debts down the road or to repay near-term maturities.

“It’s not hideous. It’s a smart business decision,” she said of the debt replacement or reduction strategy, even through she’s also keeping an eye on companies that look to take on more debt to fund mergers and acquisitions.

“M&A has picked up and you’ve got to be cautious about that,” she said.

Related: Coronavirus slashes deal-making globally: What to expect next

To be sure, some of the big winners of the pandemic debt boom have been investment banks hired to arrange the funding.

Revenue at investment banks jumped 32% to $101.6 billion in the year’s first half from a year prior, its highest level since the first half of 2012, according to Coalition, a global analytics company.

What’s more, Coalition expects the year’s swift uptick in investment banking business, particularly in fixed-income, currencies and commodities, to combine with further head-count reductions at banks and produce an 12% return on equity for institutions it tracks in its index.

That would mark a significant reversal of a trend where ROE for banks in the index have declined each year since 2016, when it hit 9.5%.

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The Trump administration wants to discourage your 401(k) from including ESG investment options

Two proposed rulemakings from the Labor Department in the past eight weeks would largely gut sustainable investing options and strategies in retirement plans. These proposals would reverse the Labor Department’s 2015 and 2016 guidance while ignoring the growing consensus among academics, retirement plan fiduciaries and professional money managers that responsible companies are likely to outperform over the long haul.

The first measure, “Financial Factors in Selecting Plan Investments,” now in the late stages of the approval process, would discourage 401(k) and other qualified retirement plans from offering funds from managers that consider environmental, social and governance (ESG) factors in their due diligence.

The proposal establishes burdensome requirements for analysis and documentation around inclusion of ESG options. The Labor Department currently has no such requirements for any other kinds of funds.

Support for the measure has been decidedly underwhelming. A group of investor organizations and financial firms analyzed the more than 8,700 public comments on the proposed rule and found that only 4% of comments expressed support. Some 95% of the comments — across individuals, investment-related groups and non-investment-related groups — were strongly opposed, and 1% expressed neutral views or didn’t clearly express support or opposition.

The 30-day public comment period ended on July 30 and the Labor Department is likely to implement the proposal before the end of the year.

The second proposal, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which was announced at the end of August, would restrict the ability of retirement plans to hold company leadership accountable through proxy voting. It alleges that proxy measures are onerous for public companies.

A fundamental misunderstanding

The reasoning betrays a fundamental misunderstanding of how financial professionals consider ESG criteria in their investments and how proxy voting practices enhance long-term value of investments. Because of inconsistent corporate disclosure rules, investors often file proxy proposals to receive relevant ESG information.

Both proposals represent a solution in search of a problem. They imply that investment managers and plan fiduciaries promote social goals over sound investment analysis, but proponents fail to cite a single instance that this has happened or any related enforcement actions they have taken.

Moreover, the agency doesn’t acknowledge any of the dozens of studies that demonstrate that consideration of ESG issues may lead to better investment outcomes. Morningstar found that during the stock collapse in the first quarter of 2020, all but two of 26 ESG indexes suffered fewer losses than their conventional counterparts. Studies of longer periods from Morgan Stanley and MSCI have found no financial trade-off in the returns delivered by ESG funds relative to traditional funds. Additionally, a 2018 report from the Government Accountability Office (GAO) reported that 88% of the academic studies it reviewed found a neutral or positive relationship between the use of ESG information and financial performance.

Setting aside the academic debates over ESG, the market has already spoken. As of 2018, more than one of every four dollars under professional management was invested using ESG criteria, according to the US SIF Foundation’s 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends. Morningstar has reported that in 2020, flows into sustainable funds outpaced traditional funds.

Read:Sustainable-investing flows have smashed records in 2020. What’s going on?

Far from making a concession to ESG, professional money managers increasingly analyze ESG factors precisely because of risk, return and fiduciary considerations. They know that bad policies and practices can harm companies’ reputations, affect consumers and lead to stock-price declines. Climate change is widely recognized as an environmental and financial risk for companies. Similarly, companies that fail to promote racial equity face real and meaningful challenges.

Investors are coming to recognize that companies with better policies and practices and more robust corporate governance will outperform over the long term. A 2018 US SIF Foundation survey of U.S. sustainable investment money managers with aggregated assets of more than $4 trillion found that three-quarters of the respondents employ ESG criteria to improve returns and minimize risk over time, and 58% cited their fiduciary duty as a motivation.

In 2020, flows into sustainable funds outpaced those into traditional funds.

The Labor Department’s proposals would largely supplant an existing regulatory regime that was already working. In 2015 and 2016, President Obama’s Labor Department carefully considered these issues and issued Interpretive Bulletins clarifying that fiduciaries of ERISA-governed retirement plans “do not need to treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.” The second Interpretive Bulletin recognized that shareholder rights, including voting proxies, are important to long-term shareholder value and consistent with fiduciary duty.

These new proposals are not taking place in a vacuum. They are part of the Trump administration’s broader effort to generate barriers to investment practices that have a focus on environmental, social or governance issues. The Securities and Exchange Commission is currently seeking to create its own barriers on this topic, including the role of proxy voting firms, fund names and shareholder rights.

By tipping the scales against consideration of ESG criteria when selecting investments and against the use of proxies to encourage better governance and better disclosure, the Labor Department proposals prevent plan sponsors from fulfilling their fiduciary obligation. It should retain current practices related to the utilization of ESG criteria and proxy voting.

Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment. Follow her @LisaWoll_USSIF. Judy Mares is former deputy assistant secretary in the Labor Department.

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These money and investing tips aim to keep you on top of the stock market’s shifting sands

Don’t miss these top money and investing features:

These money and investing stories, popular with MarketWatch readers over the past week, offer advice and insight about where to put your money — and what to avoid — as a shift to value stocks from growth appears in the U.S. market and investor bullishness is disturbingly high.

You’re loving high-flying growth stocks now, but your money should be in these companies, this market pro says

Value stocks’ time has come, writes David Booth, founder of investment giant Dimensional Fund Advisors.
You’re loving high-flying growth stocks now, but your money should be in these companies, this market pro says

The U.S. dollar’s sharp decline is driving this investment manager — reluctantly — into gold

Spiraling debt, slow COVID-19 response and trade wars could spike prices, inflation and interest rates for Americans, writes Vitaliy Katsenelson.
The U.S. dollar’s sharp decline is driving this investment manager — reluctantly — into gold

His fund has lost $21 billion this year — now he’s warning investors could be in for even more ‘turbulence’ this fall

Trond Grande, the deputy CEO of Norway’s $1.15-trillion wealth fund, says the coronavirus pandemic is not under control “in any shape or form” and it will remain the biggest issue for investors worldwide.
His fund has lost $21 billion this year — now he’s warning investors could be in for even more ‘turbulence’ this fall

Why the COVID-19 ‘baby bust’ could impact stock prices for the next 30 years

The coronavirus pandemic is causing a decline in the U.S. birth rate and that affects the pool of potential stock buyers, writes Mark Hulbert.
Why the COVID-19 ‘baby bust’ could impact stock prices for the next 30 years

The stock market’s comeuppance is coming, as bullishness gets extreme

The lesson: Keep enthusiasm in check.
The stock market’s comeuppance is coming, as bullishness gets extreme

Uh-oh: Investors predict ‘Dow 50,000’ — in just five years

New poll suggests ominous euphoria.
Uh-oh: Investors predict ‘Dow 50,000’ — in just five years

10 things you should know about diversification

Picking a winner is harder than you think.
10 things you should know about diversification

Beware of Wall Street analysts predicting how a President Biden would affect stocks and market sectors

Market forecasters are only guessing investors’ response to the November election — and not necessarily in an educated way.
Beware of Wall Street analysts predicting how a President Biden would affect stocks and market sectors

Bonds or bond funds—which is better?

How to protect yourself when interest rates rise
Bonds or bond funds—which is better?

Hedge fund fees — whether or not you make money — are truly shocking

Hedge funds keep two-thirds of profits; investors get the rest, reports Mark Hulbert.
Hedge fund fees — whether or not you make money — are truly shocking

How to navigate the COVID-19 disruption in the real estate market

Mauricio Umansky, CEO and founder of The Agency, unpacks the state of the real estate market and where the opportunities lie amid the pandemic.
How to navigate the COVID-19 disruption in the real estate market

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California wildfires, power woes pressure bonds of big utilities

Fairfield, Calif. as hundreds of fast-moving wildfires spread

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First it was California’s heat wave that threatened rolling blackouts as the state faced its worst power crisis in nearly two decades — now hundreds of wildfires.

Corporate bonds issued by utility giants Pacific Gas & Electric

and Southern California Edison’s parent Edison International

have seen their spread over U.S. Treausuries gap out since last Friday, when the state’s energy-grid operator first warned of possible power outages amid a blistering heat wave.

Then came the wildfires. The largest were sparked by lightning strikes that have surrounded the San Francisco Bay Area, forcing thousands to evacuate and blanketing the regions in smoke and ash.

On Tuesday, Gov. Gavin Newsom issued a state of emergency for California and called on the neighboring states Arizona, Nevada and Texas to help with the state’s shortage of firefighters.

PG&E’s corporate bonds, by far, have been the most actively traded within the utility sector since the blackout warnings were issued a week ago Friday, according to data tracking platform BondCliq. As the fires raged Thursday, PG&E’s bonds accounted for half of all corporate bond trading for utilities.

Breaking it down further, PG&E’s 30-year bonds due in July 2050 were the company’s most actively traded over the last week, a period in which spreads widen by nearly 30 basis points to about 297 basis points over U.S. Treasurys
as of Thursday afternoon.

Bond spreads reflect how much compensation an investor can expect to earn, in excess of a risk-free benchmark, to act as a company’s creditor, with wider spreads often indicating a more risk-averse tone or a lack of demand.

PG&E issued nearly $9 billion in bonds in June to help the embattled utility emerge from bankruptcy, but with more debt than ever before, partly due to the $25.5 billion it owed in wildfire settlements.

Read: PG&E raises fresh debt as it works toward bankruptcy exit

Its 30-year parcel of bonds from that financing were issued at a spread 200 basis points over Treasuries, but have since gapped out 50 basis points as of Thursday.

“We’ve been cautious on the utility space that’s connected to California for a while, mainly out of fears of wildfire season,” said Matt Brill, Invesco Fixed Income’s head of U.S. investment-grade corporate credit.

“As we look at this, it’s a different situation than in the past,” Brill said, pointing to the heat wave and storms, rather than any equipment failures by California utilities that have helped spark fires in recent years.

“But nobody really cares if it’s different, it looks similar to the past,” he said. “With the first signs of smoke, investors are going to get concerned.”

EIX’s 30-year bonds due in 2048 have been the most widely traded in the past week, also widening out by about 12 basis points, according to BondCliq data.

The move wider in California utility bonds comes as the closely followed ICE BofA US Corporate Index  has held relatively steady, near 137 basis points over U.S. Treasurys, as the market has entered the summer doldrums.

Major U.S. stock benchmarks were trading slightly higher Thursday, despite a weekly jobs report showing benefit claims shot back up above 1 million, signaling a slowdown in the labor recovery from the pandemic.

Shares of PG&E were down 2.5% Thursday, while those of Edison International were off 1.8%.

PG&E declined to comment. Edison International didn’t respond. 

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Investor whose winning stock-market bet amid coronavirus returned over 4,100% says ‘we are in a boom-and-bust cycle, an epic, monumental boom-bust cycle’

‘We are in a boom-and-bust cycle, an epic, monumental boom-bust cycle and this is really what a strategy like Universa’s is here for.’ 

— Mark Spitznagel

Mark Spitznagel, founder of Universa Investments, explained to CNBC during a Monday interview why he thinks that market participants should apply a modicum of caution as the S&P 500

nears its first record closing high since the coronavirus-induced rout that rocked the economy.

Stocks plunged by more than 30% in the midst of the pandemic that has put millions of Americans out of work and forced scores of companies into bankruptcy.

Universa, a hedge fund designed to benefit from tail risks–those unpredictable events which can take place more often than one would guess, and therefore often are underestimated by the broader investment community–enjoyed a remarkable run-up in the age of COVID-19.

And although Spitznagel doesn’t appear to be ready to forecast more carnage ahead for investors, he suggested that the current environment is replete with land mines for complacent investors, with the broader market viewed as overvalued due to its stunning rally against an economic that is still on uneven footing.

Read: Stock market bull, who called rally off March lows, now says S&P 500 overvalued by 5% to 10%

The S&P 500 has rallied more than 51% from its lows put in on March 23, the Dow Jones Industrial Average

has gained nearly 50% from that point, while the Nasdaq Composite Index

has climbed more than 62%, according to FactSet data.

See: If history repeats, the stock market will see a new high by the end of August

“Stock market crashes happen as a direct result of overvaluation. I don’t think there are many people around right now that would argue against the fact markets are quite overvalued,” Spitznagel told CNBC on Monday.

“Maybe they’ll get more overvalued. I think that’s the argument for being long today is that …continued overvaluation and [they can] get even more so. But they’re overvalued and this is the setup up for left tail events in stock markets,” he explained.

Read: ‘Black Swan’ author says that if investors don’t use a ‘tail hedge,’ he recommends ‘not being in the market’: ‘We’re facing a huge amount of uncertainty

“Black Swan: The Impact of the Highly Improbable” author Nassim Nicholas Taleb is an adviser to Universa.

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