Investors Crave Long-Term Debt, But Firms Don’t Want to Sell

(Bloomberg) -- Investors are clamoring to buy the one kind of security that few companies want to sell now: long-dated bonds.

When blue-chip companies have sold debt maturing in 30 years or more in the US, they’ve found heavy demand, with money managers placing orders equal to about five times the notes for sale on average. That ratio is higher than in any other period dating back to 2021.

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Drugmaker Eli Lilly & Co drew $14.7 billion of orders earlier this week for just $2 billion of 30- and 40-year bonds. Investors are eager to lock in yields above 5.5%, a relatively high level, especially as money managers enjoy robust inflows and the Federal Reserve gets closer to cutting rates.

“Being able to buy high quality investment-grade credit near 5% is something that for a long time was not available,” said David Brown, global co-head of investment grade at Neuberger Berman. “People are trying to lock in these rates.”

Companies, meanwhile, are reluctant to commit to paying elevated coupons for decades by selling debt with far-out maturities, and a quiet market for acquisitions has limited the supply of offerings. Those dynamics have spurred even more of a frenzy for the long-term debt that is available.

Heightened demand has compressed spreads in the secondary market. Bonds with 10 or more years of duration have seen risk premiums narrow 6 basis points this year through Thursday’s close, while shorter- and intermediate-dated bonds have narrowed just 2 basis points.

“Anything in the longer end of the maturity curve right now is being met with substantial, outsized demand since investors are incentivized to put their money to work in a higher rate environment, in an under-supplied part of the market,” said Jiyann Daemi, head of US corporate syndicate at TD Securities.

Some companies this year have turned to Europe for their long borrowing needs, where yields are lower. In February, Johnson & Johnson sold 30-year paper there but securities only as long as 10 years in the US, while in May Pfizer Inc. issued 20-year bonds in Europe.

For bonds with at least 10 years of duration, investors are getting a yield of 5.75%, more than a percentage point higher than the 10-year average, a Bloomberg index shows. Yields have been relatively high for longer maturities for several years, but demand this year has been even more pronounced because money managers lately have had plenty of capital to put to work.

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High-grade bond funds and ETFs logged inflows of $11.6 billion in the week ended August 6, the most since November 2020, according to Bank of America research, citing data from EPFR Global. And this year, high-grade investors are collecting more in coupons — some $465 billion — than in any other year dating back to 2018, according to JPMorgan Chase & Co. That gives them even more cash to reinvest.

US pensions are gobbling up any long-end credit, syndicate professionals say. They ended the first half of the year with the second highest funding ratio since the Great Financial Crisis, according to JPMorgan. Pensions that are overfunded typically shed risk by adding to bets in high-grade credit, where they often look to buy long-duration bonds to match liabilities that span across decades.

“You can’t sell enough long-end paper, and it just goes back to who the predominant buyer is in corporate credit currently,” said Maureen O’Connor, global head of high-grade debt syndicate at Wells Fargo & Co.

All that demand is being channeled into relatively little supply. Bonds with maturities of 30 years or more make up just 11% of high-grade sales so far this year, according to Bloomberg-compiled data, down from 15% last year.

That supply shortfall is part of what’s helping to keep investment-grade credit spreads tight: They reached levels not seen since 1998 last week at just 0.73 percentage point above Treasuries.

Companies don’t want to lock in elevated rates for a long period of time, as was the case in recent years, but they’ve had even less of a need to do so now, since fewer mergers and acquisitions have required big funding deals in the debt markets. Many of those deals often include long-duration bonds.

So far, M&A-related financing accounts for 11% of high-grade debt deals this year, compared with 13% last year, according to JPMorgan research data. Wells Fargo’s O’Connor expects to end 2025 with about $50 billion less of M&A-tied supply than she had anticipated entering this year.

Market participants are also betting on the Federal Reserve to enact two quarter-point rate cuts by the end of the year. That could accelerate the process of falling yields, giving investors another reason to buy now, even if the long-end of the curve is expected to take longer to fall.

“There does seem to be just an insatiable demand for investment-grade credit right now,” said Brian Kennedy, a portfolio manager at Loomis Sayles & Co.

--With assistance from Brian Smith.

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