A much weaker than expected US jobs report spurred forecasts for more Fed rates cuts this year coming sooner rather than later, and market participants are weighing up the potential impact on corporate bonds.
Stocks jumped and Treasury yields continued to edge down in the wake of the report that only 75,000 jobs were created in May, well short of expectations.
“Today’s report certainly supports the case for the Fed to cut interest rates sooner rather than later,” Russell Price, chief economist at Ameriprise Financial Services, told Reuters.
“It shows both that the pace of economic growth may be slowing and yet serious wage inflation pressure seem to remain elusive.”
US short-term interest rate futures indicated that traders see the Federal Reserve cutting rates three times by year’s end, with a 32% chance of a cut in June and a 75% chance in July, Reuters reported on Friday morning after the jolting jobs report was released.
“We thought they could hold off to the end of the year, but I think we get one more unemployment number in July and then they cut,” Andy Brenner, head of international fixed-income at National Alliance Securities, told IFR. He expects corporate bond issuance to remain on a steady pace for the year.
Meanwhile, investors and dealers were digesting the 23 deals priced in the IG primary this week, as issuers took advantage of a booming stock market and falling Treasury yields. Issuance for the week stood at US$24.16bn, pushing year-to-date issuance to US$547.903bn, according to IFR data.
For the week ended June 5, Lipper US Fund Flows reported the investment-grade funds net inflow was US$923.553m and the high-yield funds net outflow was US$3.217bn.
According to the Federal Reserve Flow of Funds data released on Thursday, the two largest investor groups in the US corporate bond market historically - mutual funds/ETFs and foreign investors - resumed net buying in the first quarter of 2019 following the broad market sell-off in the fourth quarter, BAML said in a research report.
Mutual funds/ETFs net bought US$51.0bn in 1Q after net selling US$71.6bn in 4Q, while foreign investors net bought US$31.5bn after net selling US$63.2bn, BAML said.
HIGH GRADE
No issuers tapped the investment grade primary Friday despite Fiserv’s up to US$12bn bond looming over the market.
The financial services technology company stood down Thursday and may look to come next week to fund its acquisition of First Data.
Participants are digesting this mornings payroll numbers.
The move greatly increases the likelihood that the Fed cuts rates in the coming months, yet a recession is highly unlikely, said Andy Brenner, head of international fixed income at national Alliance Securities.
He noted that equities were only 3% off their highs, unemployment is low at 3.6%, and while GDP is slowing down uncertainty will soon be removed from the supply chain as companies work through the tariff volatility.
“I don’t see a recession under any scenario and that makes it difficult for me to justify why the Fed needs to ease. Nonetheless I’m being taken into the flow,” Brenner said.
“If they don’t ease in July they’ll definitely ease in September assuming conditions are the same.”
HIGH YIELD
The US high-yield market is taking a breather on Friday after seeing seven issuers raise a combined US$4.575bn this week following the sudden upswing in sentiment.
Issuers tapping the market this week ran the range of the credit gamut from distressed retailer Neiman Marcus (rated Ca/CCC-) to Alaskan communications firm GCI (B) to debut issuer GrubHub (Ba3/BB).
Serial issuers such as Intelsat (Caa2/CCC+), Sirius XM Radio (Ba3/BB) and L Brands (Ba1/BB), the owner Victoria’s Secret and Bath & Body Works, also emerged from the pipeline last week.
And more are on the roster for next week, including a US$1.39bn dual tranche issue from labeler Multi-Color to fund its buyout by Platinum Equity.
With the Federal Reserve indicating that it will do what it takes to prop up economic growth and spreads still off tights, investors are largely upbeat about the market.
“It is not a screaming buy as it was at the end of last year, but I think we are comfortable,” said one investor.
Technicals also are seen as strong given the balance between net supply and money that can be put to work in the market despite Lipper reporting US$3.217bn in outflows from high-yield funds for the week ending June 5.
“Cash levels are high so even if we got redemptions it won’t lead to forced selling,” said a second investor.
STRUCTURED FINANCE
Over US$3.8bn of new ABS has been priced this week and a handful of deals from esoteric sectors are lining up in the pipeline.
Two aircraft lease deals are in the works - a US$517.1m deal from Global Jet Capital, and a US$379.9m offering from Carlyle Aviation Partners.
An US$250m auto dealer floorplan deal from Navistar also joined the pipeline on Thursday.
In the mortgage bond market, lower rates are expected to drive an increase in refinancing activity, which will affect bond prepayment speeds.
30-year mortgage rates have dropped to 3.82%, close to a two-year low, Freddie Mac said on Thursday.
With rates dipping below 4%, over US$2tr of outstanding conforming conventional mortgages are eligible to be refinanced, the agency said, which is the majority of what was originated in 2018.
LATAM
The week ended on a sour note for Mexico as Fitch followed up its sovereign downgrade by also cutting the state-owned oil company Pemex to junk.
The ratings agency, which downgraded Mexico to BBB from BBB+ late Wednesday, cut Pemex one notch to a junk rating of BB+ yesterday, citing the company’s worsening credit profile.
“People are focused on the aftermath of Mexico and Pemex,” said a senior syndicate banker.
Pemex’s bonds reacted to the news by dropping as much as three points, as was the case with its 6.750% 2047 notes.
Its 2029, 2028, 2026 and 2027 were all down an average of two points.
The oil company’s 6.350% 2048 notes were up slightly less than half a point.
Issuers remain wary about entering the market given trade volatility with Mexico and China, and now the Mexico downgrades. There were no new issues out of LatAm this week.
“The backdrop is good, investors are comfortable with the levels. But with the whole Pemex thing I think investors need to look at their portfolios and whether they need to make some arrangements,” added another syndicate banker.
Net emerging markets debt funds outflows increased significantly to US$206.486m this past week from US$5.028m the previous week, according to Lipper.
EQUITIES
Revolve, an online fashion retailer catering to Millennial women, pocketed US$211m on its IPO late Thursday.
Morgan Stanley, Credit Suisse and Bank of America Merrill Lynch responded to strong investor demand by placing 11.8m shares at US$18.00, the top of the marketed range.
The offering elicited double-digit levels of oversubscription, though the company elected not to increase the number of shares offered.
A big reason for the attraction is the fact that Revolve generated net income of US$30.3m on net sales of US$522.8m in the trailing 12 months ended March 31.
The company itself sold just 2.9m shares, with secondary sellers led by consumer products-focused VC TSG Consumer Partners kicking in the remaining 8.8m shares on the base deal.
Revolve will make a fashionable debut today on the NYSE under the ticker “RVLV”.
Looking ahead, there are as many as 13 biotechs queuing up IPO launches that could raise as much as US$2bn combined.
The first two of these deals launched this morning from Personalis and Stoke Therapeutics.
Both are looking to raise up to US$107m in their IPOs.
Stoke Therapeutics uses genetic testing to create personalized treatments for inherited diseases.
JP Morgan, Cowen and Credit Suisse are marketing 6.7m shares at US$14-$16 each for pricing on June 18.
Personalis, a maker of genetic testing kits for cancer, follows on June 19.
Morgan Stanley, Bank of America Merrill Lynch and Cowen are marketing 6.67m shares at US$14-$16.
Brazilian electric utility Neoenergia last night launched an all-secondary IPO that targets R$3.5bn (US$850m).
JP Morgan, Bank of America Merrill Lynch and Banco do Brasil are marketing 208m shares at R$14.42-$16.89 for pricing after the market close June 27.