Global corporate bond issuance reached record pace in the first week of the year. As at January 7, global companies raised more than $100 billion worth of bonds, as financiers worked in an effort to lock in the low borrowing costs before the expected rise in benchmark interest rates.

While the early-January rush is traditional, this amount of new deals may by an early indicator of the issuances expected early this year. Banks and other financial issuers dominated the deals, with a number of foreign institutions raising funds in the US markets.

New bonds have been issued by blue-chip names such as MetLife (life insurance company) and Caterpillar, as well as pandemic-hit companies such as cruise operator Royal Caribbean. Having said this, there are indications that investors may have pulled back on some orders for new bonds after the minutes from the Federal Reserve’s (‘Fed’) December meeting were issued last week.

In one of my articles back in October 2021, it was indicated that central bankers insisted that the surging inflation was purely transitory or temporary. However, the December meetings held by the Fed, the European Central Bank (ECB) and the Bank of England (BoE) suggested that central bankers are worrying that this period of high inflation has become ‘persistent’.

This worry saw the ECB and the Fed sharply scale back their bond-buying programmes, and there seems to be a clear shift across the global economy towards a more hawkish outlook on inflation.

While countries like the UK and Norway already raised interest rates to 0.25 per cent (from 0.1 per cent) and to 0.5 per cent (from 0.25 per cent) respectively, rising inflation and a tightening job market may indicate that the Fed might also follow this path. In fact, in a note published last week, Goldman Sachs’ chief economist Jan Hatzius wrote that they expect “to see hikes in March, June and September, and have now added a hike in December for a total of four in 2022”.

In 2022 we are expecting new bonds to be issued on the local stock market- Noelle Micallef

On the other hand, back in November, ECB President Christine Lagarde said that the ECB is very unlikely to raise interest rates in 2022 as inflation remains too low. Further confirming this point, Governing Council member Klaas Knot indicated that the ECB will be ready for an interest rate hike in early 2023, after ending the remaining bond purchases by the end of 2022.

In 2021, we also saw a number of local companies benefit from persistently-low interest rates. While 2020 was clouded with volatility and uncertainty brought about by the pandemic, the vaccine roll-out and the economic recovery led to €242 million worth of corporate bonds being issued on the local stock exchange in 2021.

Meanwhile, in 2022, we are expecting new bonds to be issued on the local stock market, with the bonds already announced by Gap Group plc and AX Real Estate plc to commence trading in the coming weeks. While we are still far from 2016’s record high of just under €400 million new corporate bonds issued on the Malta Stock Exchange, we do expect local companies to take advantage of the current interest rate market.

While the impact of the COVID-19 pandemic is still uncertain for the upcoming year, officials in charge of monetary policy downgraded the importance they attached to the coronavirus and its effects on economic activity.

The Fed, ECB and the BoE have all highlighted the uncertainty brought about by the Omicron variant, although none of them have indicated that it will be pivotal to policy in the coming months. But now it seems that the tightening cycle has begun and if these inflation rates continue to persist, central banks will have to face bigger challenges in the near future.

Noelle Micallef is a capital markets analyst at Curmi and Partners Ltd.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.