Analysis-Deal slump hits US high-grade bond supply, pressures spreads

By Shankar Ramakrishnan and Anirban Sen

NEW YORK (Reuters) - The pipeline for U.S. high-grade corporate bond issuance to fund mergers has fallen to the lowest levels in five years as President Donald Trump's trade war deters deals, in what could be a boon for borrowers but a challenge for banks and investors.

Wall Street had expected the Trump administration's policies such as deregulation and tax cuts to fuel a resurgence in deal activity and add $250 billion to $300 billion of investment-grade bonds to fund it this year, up from $179 billion in 2024, according to interviews with six debt capital markets bankers.  

Instead, economic uncertainty due to Trump's policies, especially the threat of tariffs on U.S. imports, has thrown markets into turmoil, and prompted executives to hit "pause" on deals while they await clarity. U.S. M&A volume in the first quarter fell 3%, Dealogic data shows. 

Meghan Graper, global head of debt capital markets at Barclays ( JJCTF ), said only $8 billion of acquisition financing is currently in the pipeline for the market, compared with roughly $100 billion at the same point last year, the lowest since June 2020.

Overall, investment-grade bond issuance volumes were expected to average $1.65 trillion in 2025, some $150 billion more than a year earlier, according to Informa Global Markets.

Daniel Botoff, RBC Capital Markets global head of debt capital markets, said he had expected some 20% of issuance volumes this year to comprise M&A financing. "But that expectation is looking optimistic," he said. 

Some bankers and analysts said the lower issuance to finance deals could put tightening pressure on credit spreads, the premium over Treasuries that issuers pay to investors. 

If the M&A slump continues, experts said it could also hit banks' bottom lines, potentially leading to job losses in the industry.

Daniel Krieter, a strategist at BMO Capital, said he now expects overall investment-grade volumes for the year to end up closer to $1.5 trillion, the same as in 2024, the second-busiest year ever for issuance. 

But that volume of issuance may not be enough to satisfy investors who are expected to be flush with cash. 

Investors will get back nearly $1 trillion this year - which is unusually high - in interest payments and as bonds mature. Most of that amount is expected to be reinvested, according to a JP Morgan research note and analyst estimates. 

This will be on top of the already-persistent investor demand to lock in the high yields on the highest-rated bonds before expected cuts in U.S. interest rates this year.

Credit spreads have tightened nearly 6 basis points since touching their widest levels for the year in March when markets turned volatile, according to ICE BAML data. But at 91 basis points, they are only 14 basis points away from their lowest levels in over a decade.

Without a burst of bond issuance to fund M&A activity, spreads may remain at these tight levels or narrow further even if the economy slows and risk in these bonds increases. 

"Growth is almost certain to slow as a result of Trump's trade and tariff policies but a recession appears unlikely in the medium term," said Edward Marrinan, macro credit strategist at SMBC Nikko Securities.

"We do not expect credit spreads to move materially wider from current levels - unless our view on recession changes," said Marrinan.

The comedown in expectations of issuance has been dramatic. At one point in the first quarter it looked like they were on the right track with some big deals announced. 

In March, for example, nearly $49 billion was raised by investment-grade companies to fund acquisitions, including a $26 billion eight-part bond offering by candy giant Mars to finance its $36 billion takeover of Pringles maker Kellanova ( K ) - the largest M&A financing in two years - and a $10 billion six-part bond offering by design-software maker Synopsys ( SNPS ) to support its $35 billion purchase of Ansys ( ANSS ).

But Barclays' ( JJCTF ) Graper said that trend has not held up and the pipeline has dried.

Volatility is "putting a dampener on dealmaking activity with buyers reluctant to pay what sellers want in an uncertain macro environment," said Sandeep Desai, co-head of leveraged debt markets for North America at Deutsche Bank.

With a lag between announcement and financing, the absence of an outsized pipeline already in place does not bode well for the year.

"New M&A that will need financing this year would have to be struck in the next few months," said Victor Forte, head of investment-grade capital markets and syndicate at Mizuho. "But that progression has been delayed because of the macroeconomic uncertainty."  

(Reporting by Shankar Ramakrishnan and Anirban Sen in New York; Editing by Paritosh Bansal and Matthew Lewis)