(Bloomberg) -- Coupon payments from high-grade corporate bond portfolios are growing, and investors are pouring the money back into the bond market, fueling demand that should help bolster spreads into next year, according to Barclays PLC.
Coupon income has absorbed 62% of net supply in the investment-grade market so far this year, Barclays said in a note Friday. That figure is expected to grow to 66% of net supply in 2025, up $40 billion to about $400 billion total, the bank said.
The surge comes as payouts from coupons has grown in years past. The average investment-grade coupon currently pays 4.36%, up 21 basis points from 2023 and 70 basis points since 2022’s trough, Barclay’s noted.
“Given the rise in rates over the past few years, coupons have grown to be a sizable piece of the demand backdrop, and as such, have created another technical tailwind for credit products,” analysts Dominique Toublan, Bradford Elliott and Jack Sweeney wrote.
The analysts said they expect the average coupon will jump another 25 basis points next year.
“We think that most of the coupons, one way or another, get reinvested back into the IG market,” they said.
When more than 60% of the market is bolstered by coupons, it has almost always pushed spread volatility below average, they added. An exception came in 2018, when a trade war with China and “Fed policy error” led to larger spread moves.
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