Wall Street banks are expected to launch a series of bond offerings next week to capitalize on ultra-low credit spreads and robust investor demand. Following the release of quarterly earnings on Friday, the six largest U.S. banks may borrow between $20 billion and $24 billion, surpassing the usual $15 billion raised in October over the past decade. Despite an increase in bank borrowing this year, bond issuance has returned to normal since the Federal Reserve ceased interest rate hikes last year and began cutting rates.

Analysts anticipate that banks will take advantage of borrowing costs near a 20-year low to complete sales of at least $15 billion to $20 billion. Banks typically issue bonds after releasing quarterly earnings, and the large banks, as the biggest borrowers in the U.S. investment-grade bond market, are preemptively addressing potential volatility around the U.S. elections in November.

Among them, JPMorgan Chase credit analyst Kabir Caprihan noted in a research report on Monday that the six largest U.S. banks may take on a substantial amount of debt after announcing their quarterly results. According to data from Bloomberg, Caprihan stated that this is more than what they usually raise in October, and so far this year, these banks have already borrowed about $107 billion at the holding company level. Despite the increase in borrowing, bond issuance has returned to normal levels since the Federal Reserve stopped raising interest rates last year and began to cut them.

Advertisement

Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, believes it is reasonable for banks to issue new bonds after earnings announcements and before the election, expecting the supply to normalize in the coming quarters. Large banks always need new funds to support lending, and as the biggest borrowers in the U.S. investment-grade bond market, they are known for their astute timing in borrowing.

Bloomberg Intelligence analyst Arnold Kakuda stated that these banks are taking advantage of borrowing costs near a 20-year low due to strong investor demand, and it is expected that the "six largest banks" will complete sales of at least $15 billion to $20 billion. Banks may strategically issue bonds above this level to meet the huge demand from bond investors for corporate bonds.

It is understood that banks typically issue bonds after announcing quarterly earnings. JPMorgan Chase (JPM.US) and Wells Fargo (WFC.US) will announce their quarterly earnings on Friday, while Bank of America Corporation (BAC.US), Citigroup (C.US), and Goldman Sachs Group (GS.US) will announce their results next Tuesday, with Morgan Stanley planning to release its earnings the following Wednesday.

Moody's Ratings expects strong trading revenue for large banks in the third quarter, with investment banking also improving compared to the same period last year, partly due to an increase in corporate debt and equity issuance.

Currently, all eyes will be on the forecast for full-year net interest income, a measure of the difference between the interest banks charge on loans and the interest they pay to depositors. This is the largest source of revenue for traditional banks, so any hints about what they can achieve by 2025 will be very important, especially as the Federal Reserve is expected to continue cutting interest rates.

Despite some credit issues facing the entire banking industry, especially smaller banks with commercial real estate operations, S&P analysts wrote in a report on September 27 that the outlook for most banks is stable, and regulatory tightening since regional crises has had a positive impact on credit.

In addition to the bank bonds expected to be issued this month, JPMorgan's Caprihan predicts that between November and January next year, an additional $30 billion to $40 billion in new bank bonds will enter the market.Samuel Wilson, a portfolio manager at Voya Investment Management, stated that his firm would be among the investors looking to make a purchase. He believes that in a market where corporate bond spreads are so tight, bank stocks stand out as a rare bright spot, and investors must seek opportunities that are worth the risk but offer slim rewards.

As of Wednesday's close, the average U.S. investment-grade spread was at 82 basis points, the tightest level since September 2021. Wilson said, "Even in a strained market, this is still a trade that we like."