Higher Coupon Payments to Boost Credit Demand by 15% in 2024, BofA Says

Key Takeaway

• Corporate bond interest income is projected to rise 15% in 2024, boosting demand for investment-grade credit.
• From June to December, $220 billion in coupon payments will meet a net supply of $89 billion, supporting strong IG technicals.
• BofA expects credit spreads to remain tight between 90 and 110 basis points due to high demand and low issuance.

Rising Interest Income

Corporate bond investors are experiencing a significant boost in interest income as rates have been on an upward trajectory since 2022. According to strategists at Bank of America Corp., the total income generated by the corporate bond market is projected to be about 15% higher in 2024 compared to the previous year. This increase in income is expected to sustain high valuations in the investment-grade credit market as investors reinvest their earnings.

From June to December, total coupon payments are anticipated to reach approximately $220 billion, while net supply is likely to be around $89 billion. This disparity between rising demand and limited supply is expected to keep investment-grade technicals robust for the remainder of 2024. "That extra coupon cash should help keep IG technicals stronger for the remainder of 2024," noted the BofA strategists.

Narrowing Spreads

The main index monitored by BofA strategists stood at a spread of about 92 basis points as of Friday. They predict this level to remain between 90 and 110 basis points over the next six months. Historically, the spread has averaged around 127 basis points over the last decade. However, strong demand and relatively light issuance are expected to maintain tighter levels in the near term.

Investment-grade bond sales volume tied to acquisitions has also been declining. In May, there was about $12.6 billion of merger and acquisition-related issuance, down from $54.9 billion in February. This reduction in issuance volume further supports the trend of narrowing spreads.

Default Rates on the Rise

Deutsche Bank analysts have indicated that the era of low corporate default rates, which has persisted for the past two decades, is coming to an end. The increase in interest rates is expected to lead to a higher number of borrowers failing to repay their debts. "For 40 years, virtually all fixed-rate borrowers across the economy could refi at a lower rate than they’d previously achieved," wrote Deutsche Bank analysts Jim Reid and Steve Caprio. "This changed after 2022, but the full impact could still be slow to be felt."

Central bankers' efforts to combat rising prices by increasing rates have made borrowing more expensive for riskier companies, leading to an uptick in defaults globally. While defaults have not yet reached the levels many anticipated, the number of maturities in the next few years for lower-rated borrowers could exacerbate the situation. More than 20% of sub-BB borrowers are facing a maturity in the next three years, according to Deutsche Bank's research.

Street Views

• Yuri Seliger, Bank of America (Bullish on investment-grade corporate bonds):

  "That extra coupon cash should help keep IG technicals stronger for the remainder of 2024."