US high-grade market pulls down shutters after correction
US investment-grade bond issuance may be done for the year following heightened volatility that has dampened investor demand for debt and increased financing costs for borrowers, four syndicate bankers told IFR.
A shutdown in the primary market would easily make this the quietest December month for issuance since the financial crisis, with just US$4.3bn of supply so far, according to IFR data.
The prior low for the month was US$21.1bn back in 2008, at the depths of the financial crisis.
“In my opinion, we are not going through a blip but a structural shift in the financial markets,” one syndicate manager said.
“This does not feel like a soft period in the markets and is probably the most challenging issuance environment I have seen for 10 years.”
Even if a few more deals do surface, volumes would struggle to reach double digits, another banker said. On an annual basis, this would be the first time in eight years that the US high-grade bond market has not set a new record, IFR data show.
As its stands, volumes for 2018 are running at US$1.173trn, down from US$1.313trn a year ago.
“We were looking to push nine to 10 deals to market this month, but after today we’re down to zero to three,” said the banker.
A pulled deal earlier this week from ING Groep has also unnerved would-be borrowers as the Dutch bank is regarded as a high quality issuer.
“It does give you a sign of how bad the market is; that a name that good can get held up,” one banker said.
A litany of worries including weak returns for high-grade bonds, wider credit spreads, tanking stocks, falling oil prices, tense US-China trade relations, a looming Brexit vote and financial problems in Italy is spooking investors.
The yield curve also inverted this week, with the five-year treasury yield now trading lower than both the two and three-year, which some see as a prelude to a recession in the next year or two.
Torsten Slok, chief international economist at Deutsche Bank, said there was no need to panic.
“At the moment things are complicated,” he said. “(But) if you look at the economic data we see a clear story: We will not have a recession anytime soon.”
But with the Dow Jones Industrial Average falling by more than 400 points at the open on Thursday, would-be borrowers decided to remain on the sidelines.
Those that have braved the market this week have seen a lukewarm reception. Orders books on deals from Caterpillar Financial Services and Moody’s, for example, were less than twice covered.
Average spreads on US high-grade bonds, meanwhile, have hit their widest levels since August 2016 at 146bp over US Treasuries, according to ICE BAML data.
“You’d have to go back to the ’80s to find a more volatile market, one of the bankers said.
“It’s not a crash or a financial crisis but it’s a major correction,” the banker told IFR. “It’s a major correction in equities and it’s a major correction in the corporate bond market.”