Ford and Toyota are helping spark a corporate borrowing spree worth as much as $60 billion in January

While the beginning of every year typically spurs a wave of corporate borrowing, January looks a little different. That's because bond investors have been enjoying some of the highest returns in a decade, despite a pullback from peak levels in October, but they may also soon face a Fed pivot to lower interest rates.

“January is historically a very strong month for supply,” said Shannon Rinehart, portfolio manager at Columbia Threadneedle, while noting nearly $26.5 billion in new investment-grade issuance on Tuesday.

Reinhart said the Fed's indication last December that interest rates may have peaked seemed to spark fear of missing out among some investors, helping bolster the demand side of the equation, even as her team expected a strong increase in… $45 billion to $60 billion in new bonds. The supply of investment grade bonds will appear during the month.

Returns in this sector have also improved significantly from just a few months ago, with the ICE BofA US Corporate Index now on track for an 8.4% one-year return, while the benchmark Bloomberg US Aggregate Index is pegged for a 5.28% one-year return. . According to FactSet.

“The only mistake I would say people might be making is constantly betting on Treasury bills or CDs or bank deposits,” Philip Toews, CEO and co-portfolio manager at Toews Asset Management, said in an interview Tuesday.

If inflation is benign, history shows that investment-grade, high-yield corporate bonds have performed very well in periods when the Fed has eased monetary policy, Toews argued.

“People need to be more optimistic about the opportunities in bonds and not get married to the financial markets right now,” Toews said.

Money market funds got a big boost from outflows from bank deposits after the banking crisis last March, which helped the sector end 2023 with near-record levels of assets, at $5.9 trillion, according to the Investment Company Institute.

Fed Chairman Jerome Powell surprised investors in December by saying that the central bank does not want to make the mistake of keeping interest rates high for too long, while also planning three rate cuts in 2024. This could mean investors will quickly receive returns of 5%. % in the treasury and bills and other “cash-like” investments evaporate.

Related: The Fed could be the Grinch who “stole” the cash he earned at 5%. What does the Powell pivot mean for investors?

Hopes for a soft landing for the economy and the Fed's shift helped lead to a sharp decline in the benchmark 10-year Treasury yield BX:TMUBMUSD10Y.,
This helps reduce borrowing costs and boost bond yields.

be seen: Deutsche Bank chart shows 'one of the most aggressive rallies' in markets in decades turned bond losses into gains in 2023

However, companies are likely yet to feel the full effects of the Fed's 5.25% to 5.5% interest rate, which could impact corporate earnings.

“A 10-year Treasury yield below 4% would help,” Adam Turnquist, chief technical strategist at LPL Financial, told MarketWatch. “But we are not heading into an era of ultra-low interest rates.”

But Turnquist also believes that the weakness of the dollar in recent months compensates for the rise in interest rates, especially since a large slice of American corporate profits comes from abroad. “A weaker dollar helps companies' bottom lines.”

The 10-year rate was near 3.95% on Tuesday, close to where 2023 began, after briefly rising to 5% in October.

The yield on the ICE BofA US corporate index was last pegged at 5.14%, after reaching 6.3% in October, and for most of the past decade has remained below 4%, according to Federal Reserve data.

Stocks finished mixed on Tuesday, as the Dow Jones Industrial Average (DJIA) posted another record close, but the S&P 500 SPX and Nasdaq Composite Index COMP ended lower as January began.