Post-Labor Day corporate debt spree revives U.S. Treasury selloff

Illustration picture of U.S. Dollar banknotes

By Matt Tracy and Davide Barbuscia

(Reuters) - A post Labor-day rush of bond issuance by U.S. investment-grade-rated companies added renewed pressure on long-end U.S. Treasuries, as some investors switch to buying top-rated corporate debt offering higher yields than those on government bonds.

At least 21 investment-grade rated bond offerings are expected to price on Tuesday, according to International Financing Review (IFR) data.

Investors told Reuters they expect anywhere between $100 billion and $150 billion in new bond issuance this month.

The average yield on U.S. investment-grade bonds was 5.73% as of Monday, compared to 5.47% at the start of the year and 2.44% in January 2022 when the Fed began hiking rates to combat inflation, according to ICE BAML data.

"September tends to be a very heavy supply month, so people will sell Treasuries and existing credit to make room for new issuance," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.

Ten-year Treasury bond yields were last about nine basis points above Friday's market closing, at 4.27% from 4.180%, and 30-year yields similarly climbed about 9 bps to 4.38% from 4.285% on Friday.

Long-term Treasury yields, which move inversely to prices, have surged for much of the past couple of months as investors priced in the possibility of interest rates remaining higher for longer than anticipated, as the U.S. economy has proved surprisingly resilient to higher rates.

Other factors have also contributed to the selloff, from higher government bond supply to rising concerns around U.S. debt sustainability, as highlighted by Fitch’s downgrade of U.S. debt last month.

Yields retrenched last week but started climbing again on Friday.

With the Federal Reserve largely expected to keep interest rates on hold at its next rate-setting meeting this month, the corporate bond supply was seen as a factor contributing to higher yields in the coming weeks.

"I don’t necessarily think (the Fed) has got any more rate moves or rate tightenings left," said Tom di Galoma, managing director and co-head of global rates trading at BTIG.

"For right now, it’s just all about supply, and I think that’s what’s pushing yields higher," he said.

September is typically the second-busiest month for U.S. debt issuance, according to credit research analysts at JPMorgan Chase, with an average issuance volume of $129 billion over the past four years outside 2020.

Among Tuesday's announced deals were a two-part senior unsecured note offering from Unilever Capital Corp, three-part senior notes from tobacco company Philip Morris International and a five-part note offering from automaker Volkswagen.

(Reporting by Matt Tracy and Davide Barbuscia)