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Banks rush to bond market ahead of rates rise

Banks have flooded the market with debt in the first days of the new year, propelling a record pace of bond sales as companies seek to lock in borrowing costs before interest rates rise further.

The sales have been met with ample investor appetite ahead of the fourth-quarter earnings season, when the majority of US banks are expected to report improved profitability.

Banks have sold $42bn of the near $73bn of corporate debt issued so far this year, including a $5.25bn offering from Citigroup, a $5bn deal by Barclays and a $4bn sale from Credit Suisse, according to Dealogic. The issuance has bolstered overall activity at the start of the new year, with two of the 20 busiest corporate bond trading days on record set in the first three trading days of 2017. 

The uptick in trading volumes has reflected a broad market rebalance since the US election of Donald Trump in November and interest rate rise by the Federal Reserve in December, as investors expect faster economic growth, a looser regulatory regime and higher inflation.

Those expectations have favoured bank stocks, with shares of Bank of America and Goldman Sachs up more than 30 per cent and Morgan Stanley and JPMorgan rising more than 20 per cent since the election. 

Higher bond trading volumes have boosted fixed-income businesses across Wall Street, while higher interest rates are expected to buoy the margins banks earn on loans to consumers and companies. 

“Expectations around fiscal spending and loan demand, lower taxes, and lighter touch regulation have coupled with actual fundamental improvement to drive the space,” said John Moran, a banking analyst with Macquarie.

Jason Goldberg, an analyst with Barclays, added that trading revenues for the five largest investments banks — JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley and Citi — would probably rise for the first time in four years in 2016. Furthermore, he expected overall investment banking revenues for this group to break out of a longstanding annual range of $102bn-$104bn in 2017. 

JPMorgan and Wells Fargo are among the groups to kick off the results season, with reports due before markets open on Friday.

Investors have shown a strong interest in the new debt sales, which have been dominated by European banks raising funds to meet regulatory requirements. 

“The performance of the new issues has been strong and the impact on secondary market spreads has been muted,” said Hans Mikkelsen, a strategist with Bank of America Merrill Lynch. “It suggests the market is set up to absorb elevated amounts of issuance.”

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