Banks’ Debt Sales Are Driving the Corporate Bond Market

Since banks reported their third-quarter financial results earlier this month, Goldman Sachs Group Inc., GS 0.10% Morgan Stanley MS 0.11% and Bank of America Corp. BAC -0.13% have all come out with multibillion-dollar bond sales. In April, Bank of America and JPMorgan Chase & Co. completed the largest-ever bank debt sales.

Banks are playing a greater role in propelling the corporate bond market, which has otherwise slowed from last year’s pandemic-induced debt bonanza. Financial institutions are the issuers behind more than a third of U.S. investment-grade debt so far this year, according to Dealogic, the highest share for any year going back to the dawn of the modern megabank.

The record debt sales might seem unnecessary because banks are already up to their eyeballs in cash. The biggest consumer and commercial banks have collected trillions of dollars of deposits since the pandemic started.

But deposits are only one part of the liability equation for the biggest banks. They are also required to keep a certain share of their liabilities in long-term debt. Because of that, the ratio of debt to other liabilities can get out of whack when deposits grow as much as they have. So banks are issuing more bonds to navigate the regulatory hurdles.

Requirements that long-term debt make up a minimum share of banks’ liabilities is a consequence of regulations after the financial crisis of 2008-09. The idea is that a layer of long-term debt makes banks less susceptible to panic in short-term funding markets, which was a key reason for the demise of Lehman Brothers.

It doesn’t hurt, too, that banks selling debt today are able to lock in low, long-term borrowing costs. That could help bolster profits down the road should short-term rates rise in the future and lending picks up steam.

At the moment, though, loan demand has been weak. During the pandemic, consumers cut back on spending and received federal stimulus payments, which gave them money to pay down loan balances. That has made it tough for banks to make use of the cash sitting on their balance sheets. Bank of America, for example, has more than twice as much money in deposits than it has lent out.

Goldman Sachs and Morgan Stanley don’t have large deposit bases but have been selling bonds to support growth. Goldman said in third-quarter results that it has been growing its equity and fixed-income financing businesses. Bank of America is also issuing debt partly to support capital markets activity.

Investors, meanwhile, sense opportunity in bank debt. Tom Murphy, head of investment grade credit at Columbia Threadneedle Investments, said he currently likes banks and has participated in some of their debt sales this year.

Bank bonds trade at a higher yield relative to industrial company bonds with similar ratings, which means Mr. Murphy can pick up as much as an extra 0.3 percentage point in yield over industrials for no more credit risk.

At the same time, banks should benefit if higher inflation keeps pushing up interest rates. “The macro backdrop should be good for these institutions,” Mr. Murphy said.

Bank stocks also have been popular this year. The KBW Nasdaq Bank Index, which measures shares of the largest banks, has risen 45% this year, more than double the S&P 500’s gain. The rally has continued this month after banks reported profit growth across the board for the third quarter.

Write to Ben Eisen at [email protected]