Companies may issue $1.5 trillion of US bonds in 2025

Corporations have issued more than $1.4 trillion of investment-grade US bonds and have broken four monthly issuance records in 2024, putting them on track for the second-busiest year ever. Company bond sales are also expected to surge in 2025, according to Goldman Sachs Global Banking & Markets.

There are several reasons corporate debt offerings have been so plentiful. Many corporate treasurers and CFOs took care of their financing early this year to avoid the risk of a spike in volatility around the time of the US election, says John Sales, head of Investment Grade Syndicate in the Americas in Global Banking & Markets. At the same time, “funding conditions for the vast majority of this year have been about as good as you could ask for,” he says.

There are signs that the momentum in bond offerings will continue. Between the annual need to refinance more than a trillion dollars of maturing debt and an increase in financing amid solid economic growth, Sales says it’s reasonable to expect borrowers to issue $1.5 trillion or more of corporate bonds in 2025 and potentially in coming years. “If the economy is growing, if companies are growing, if balance sheets are growing, you will see debt to finance that growth,” he says.

Valuations and yields have boosted corporate bond issuance

For corporate borrowers, the extra yield (or spread) they pay relative to Treasury bonds has seldom been lower. For much of 2024, investment-grade corporate bond spreads have been less than 100 basis points, according to the Bloomberg US Aggregate Corporate Index. That index hit 79 basis points the week of October 18, marking the tightest level since March 2005.

“These are the best spread levels our issuers have seen in the last 20 years,” Sales says. The only comparable spreads came in the summer of 2021, when market volatility had evaporated and the Federal Reserve’s policy rate was near zero. “That's a big reason why folks are jumping to lock in the current rates,” he adds.

Bond yields may be converging toward the long-term interest rate targeted by policymakers, known as the Fed’s terminal rate. Sales says his team expects the terminal rate to be around 3.5%. Ten-year US Treasury yields have already fallen to 4% or even lower. Taken together, with bond yields not far from the expected terminal rate, and spreads hovering around 20-year lows, “conditions are about as good as they’ve ever been, Sales says.

M&A activity has propelled bond issuance

Mergers and acquisitions in a range of industries have also propelled the supply of bonds.

US investment-grade bond sales linked to corporate acquisitions are on track for their highest volume since 2019. Those transactions have been boosted by deals in the energy, healthcare, and consumer sectors, Sales says. “We've seen a lot of investment-grade supply to fund M&A,” he says. “That's a theme that we expect will continue into 2025 as M&A remains a top capital allocation priority for most of our large cap clients.”

Issuance from utility companies has also surged amid capital expenditures to support power demand from data centers and electrification. Offerings from that sector have risen 18% this year compared with the same period in 2023 (as of October 10). “There's no question that we’ve seen a huge uptick in capex from the utility sector, and a big way in which the utility sector will fund that capex is through debt issuance, Sales says.”

Money may flow from short-term debt to longer-term bonds

As the Fed lowers interest rates, reducing the yields on shorter-maturity debt, money is poised to flow increasingly into longer maturity investment-grade bonds, Sales says. Many investors have been able to buy short-term Treasury bills yielding more than 5%, but that yield is falling.

“I would expect that money will migrate away from high yielding T-Bills and into the investment-grade asset class,” Sales says. “That's something we are in the early stages of now, and that's a theme we expect will continue over the next handful of months and quarters as the Fed continues the cutting cycle.”

When it comes to the economy, investors’ focus has moved from inflation, which is cooling, to the outlook for growth. Economists in Goldman Sachs Research recently lowered their probability forecast for a US recession in the next 12 months to 15%.

US GDP growth is supporting corporate bonds

And as rates fall, investors are snapping up debt with higher yields, or coupons. “If the Fed is going to be cutting, if we've hit a ceiling in terms of interest rates, investors want to lock in coupons for as long as they can,” Sales says. “Demand in the long end of our investment-grade market has been as strong as we've seen at any point over the last handful of years.”

Put another way, growth is a primary reason the $1.4 trillion of corporate bonds sales  outpaced expectations this year. “What you are seeing, plain and simple, is growth,” he says. “You're seeing growth in the economy. You're seeing growth in corporate America. You're seeing growth of the balance sheet. And as companies grow, they issue debt to finance that growth.”

 

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