RBC warns of the pressure from the "trillion-dollar U.S. debt wave": If there is a shortfall of 300 billion incremental funds, the yield spread of high-rated bonds may suffer a heavy blow.

According to the analysis of Royal Bank of Canada's global asset management company (RBC), the net issuance of high-grade bonds is expected to reach an unprecedented $1 trillion scale. This year, the market needs to attract more investors to participate in order to digest about $300 billion of new bond supply, otherwise the US corporate bond market may face the risk of sell-offs. Andrzej Skiba, head of the US fixed income department at BlueBay, a subsidiary of Royal Bank of Canada, pointed out that in the context of a steepening yield curve, the spread between long-term bonds and short-term bonds is significantly widening, driving investors to shift approximately $200 billion from money market funds to the corporate bond market. He further explained that in addition to money market funds, redemption funds from mortgage-backed securities (MBS) will also be an important source of additional funds. He added that if new funds cannot be attracted to cover the financing needs related to debt for artificial intelligence data centers and M&A activities, against the backdrop of repricing in the technology and other industries, the average spread of high-grade bonds may widen by 20-30 basis points. Although risk premiums are near multi-decade lows, there are signs of slowing demand in the secondary market. For example, in the case of Oracle Corporation's bond issuance last week, with a total of $250 billion issued in eight tranches, investor subscriptions exceeded $129 billion, setting a new record for such issuances. However, although the spread of the new bonds briefly narrowed below secondary market levels, market sentiment reversed afterwards. Concerns about increased technology spending escalated rapidly as giant cloud service providers disclosed their latest investment plans, on top of expectations of around $650 billion in investment in data center infrastructure by the top four US technology companies, ultimately leading to a widening of the spread of Oracle Corporation's new bonds. Alphabet (GOOGL.US) raised $200 billion through a US dollar bond issuance on Monday, exceeding the initial expectation of $150 billion. The bond issuance by the parent company Alphabet Inc. Class C attracted orders worth over $100 billion. In an interview, Skiba said: "The size of the new issuance book doesnt matter at all because all demand can vanish in an instant. Dont be swayed by demands for any specific trades, focus on market reactions to a broader narrative." He and his team are less positive about credit than in recent months, but they still maintain an overweight position, as they expect the market to be able to absorb the new supply. He stated that if investors are cautious in investing during the issuance cycle and operate flexibly within the borrowing window, they can still find some discount opportunities. Skiba sees opportunities in corporate hybrid bonds, which combine characteristics of debt and equity. Since Moody's Corporation updated its policy in 2024, simplifying the process of determining how much equity should be considered in hybrid bond issuances, the issuance volume of such bonds in the US has been increasing. Skiba noted that investors should steer clear of bonds issued by industries whose spreads are nearing multi-year lows and those with specific industry issues, such as business development companies (BDCs). These companies have been under pressure as they invest heavily in software companies whose business models may be replaced by artificial intelligence. What could prompt him to reduce credit exposure? If new capital fails to materialize to absorb the incoming wave of debt, economic growth slows, inflation rises again, and the US experiences large-scale layoffs. He added that investors need to understand that under the leadership of the next Federal Reserve Chairman nominated by Donald Trump, Kevin Warsh, the so-called "Fed put" may be weaker than in the past. He referred to a market belief that the Federal Reserve will intervene to support markets in case of a major downturn. He said: "Our market has gotten used to expecting policymakers to step in and save the day at the first hint of drama, but this time that won't happen." Skiba believes that even if spreads widen due to supply, the magnitude should not be too great. This is because financial markets are accustomed to buying on dips (betting that prices will rebound), so unless there is significant political turmoil like with GEO Group Inc, the risk of spread widening in recent years has been largely absorbed.