Interest rates

Global debt in a race against rising interest rates – Noelle Micallef

Global corporate bond issuance reached a record pace in the first week of the year. As of Jan. 7, global companies have raised more than $100 billion in bonds as financiers scramble to lock in low borrowing costs ahead of an expected rise in benchmark interest rates.

While the rush at the start of January is traditional, this number of new transactions may be an early indicator of the issuances expected at the start of this year. Banks and other financial issuers dominated transactions, with a number of foreign institutions raising funds in US markets.

New bonds were issued by blue chip names such as MetLife (life insurance company) and Caterpillar, as well as pandemic-hit companies such as cruise line Royal Caribbean. That said, it appears investors have withdrawn some new bond orders after the Federal Reserve (“Fed”) December meeting minutes were released last week.

In one of my October 2021 articles, it was stated that central bankers were insisting that the spike in inflation was purely transitory or temporary. However, December meetings of the Fed, European Central Bank (ECB) and Bank of England (BoE) suggested that central bankers fear that this period of high inflation has become “persistent”.

This concern has led the ECB and the Fed to drastically reduce their bond buying programs, and there appears to be a clear shift in the global economy towards a more hawkish outlook on inflation.

While countries like the UK and Norway have already raised their interest rates to 0.25% (from 0.1%) and 0.5% (from 0.25%), respectively, rising inflation and tightening labor market could indicate that the Fed could also follow this trend. path. In fact, in a note released last week, Goldman Sachs Chief Economist Jan Hatzius wrote that they expect to “see upside in March, June and September, and have now added an upside in December for a total of four in 2022”.

In 2022, we expect new bonds to be issued in the local stock market– Noelle Micallef

On the other hand, in November, ECB President Christine Lagarde said that the ECB is highly unlikely to raise interest rates in 2022 as inflation remains too low. Further confirming this point, Governing Council member Klaas Knot indicated that the ECB would be ready for an interest rate hike in early 2023, having ended remaining bond purchases by the end of the year. of 2022.

In 2021, we have also seen a number of local businesses benefit from continued low interest rates. While 2020 was clouded by the volatility and uncertainty caused by the pandemic, the deployment of the vaccine and the economic recovery led to the issuance of corporate bonds worth 242 million euros at the local scholarship in 2021.

Meanwhile, in 2022 we expect new bonds to be issued on the local stock market, with bonds already announced by Gap Group plc and AX Real Estate plc expected to start trading in the coming weeks. Although we are still a long way from the 2016 record of just under €400m of new corporate bonds issued on the Malta Stock Exchange, we expect local companies to benefit from the current interest rate market. ‘interest.

While the impact of the COVID-19 pandemic is still uncertain for the year ahead, monetary policymakers have downgraded the importance they attached to the coronavirus and its effects on activity economic.

The Fed, ECB and BoE all pointed to the uncertainty surrounding the Omicron variant, although none of them indicated that it will play a central role in policy in the coming months. But now it looks like the tightening cycle has begun and if these inflation rates continue to persist, central banks will face greater challenges in the near future.

Noelle Micallef is a capital markets analyst at Curmi and Partners Ltd.

The information presented in this commentary is provided for information purposes only and should not be construed as investment advice, nor be used or considered as an offer or solicitation to sell/purchase or subscribe to financial instruments, nor constitute a any advice. or recommendation with respect to these financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is authorized by the MFSA to carry on investment services business.

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