IFR SNAPSHOT-Twitter tariff threats unleash market turmoil

10 min read
Americas
John J. Doran

A brief respite on Thursday and then again a plunge into the sea of volatility as stocks look to head off a cliff and corporate bond spreads jar wider.

President Trump’s twitter tariff threats faced south, this time aimed at Mexico and imports. Cars and car parts are among the targets, which could roil the auto market here and burden consumers.

The ongoing wrestling match with China is still in the mix.

And of course there is the broader economy at stake.

The yield curve continued its inversion Friday morning, with the 1-year note widening its spread above the 10-year benchmark, a possible sign of recession to come - at some point in the future.

Bank of America Merrill Lynch was somewhat sanguine about the flip.

“We do not think a recession is imminent,” BAML said in a report. “The trade war is a headwind, particularly to the manufacturing sector, but domestic economic fundamentals are sound.”

And speaking of the future, traders are voicing their opinions in the futures market.

Fed funds futures now show about a 61% chance of the Federal Reserve chopping interest rates twice or more by the end of 2019 versus a 47% chance recorded on Thursday.

This trade drama has played out all week, sending a number of corporate bond issuers to the sidelines.

The high-yield market saw only two deals this week, totaling US$1.1bn. This was the slowest week in high-yield sector this year, according to IFR data.

And not to be outdone, the investment-grade market saw its slowest week of 2019, with 10 issuers selling just US$5.85bn, well short of the forecast of up to US$20bn, according to IFR.

And the month of May did not bloom with lots of IG deals and volumes, as it also fell short of forecasts, hitting just US$104.35bn, about US$20bn short of expectations, according to IFR.

And fund flows into bond funds turned negative this week. For the week ended May 29, Lipper US Fund Flows reported that the investment-grade funds net outflow was US$5.096bn and that the high-yield funds net outflow was US$1.27bn.

HIGH GRADE

No borrowers were expected in investment-grade market Friday as credit spreads widened on news of new tariffs on Mexican imports.

Borrowers were also spooked by the level of new issue concessions Thursday’s issuers paid to complete their deals.

Secondary spreads are materially wider across the board this morning, especially US auto makers that were among the hardest hit due to their reliance on Mexico’s supply chain.

GM bonds are as much as 29bp wider this morning while Ford bonds are trading hands as much as 27bp wide to the day prior, according to MarketAxess data.

Additionally, the CDX IG32 index is two points wider this morning.

Thursday’s issuers came with double-digit concessions and nearly all failed to build books to at least two times covered.

This was already the slowest week of 2019 with just US$5.85bn in issuance across 10 issuers, and one syndicate said issuers are side lined until they see a string of a few solid days of performance.

May disappointed on supply and June is expected to be lower as well, forecast to be in the US$80bn area compared with the US$111.192bn sold during the same month last year.

“The technicals of lower supply may help overcome some of the spread volatility,” another syndicate told IFR.

“Investors are very aware that the pipeline is not as robust and they may look to jump onto the right deal.”

HIGH YIELD

With Neiman Marcus pushing out its exchange offer by another day, the primary market for US junk bond sales is on course to see its slowest volume week this year, according to IFR data.

Fears of a slowing global growth on the back of the US-China trade war have dampened issuance across asset classes this week and were only exacerbated overnight following US President Donald Trump’s threats to slap tariffs on Mexico.

Bonds prices in the high-yield market are largely seeing red on the news, with auto related names being the most traded.

The 7% 2026s issued by Adient, a manufacture of automotive seating, was down over a point at 99.375, while the 6.5% 2027s issued by auto component firm America Axel & Manufacturing had slipped close to two points to hit 94.75, according to MarketAxess data.

“Autos are a huge focus,” said a trader. “Right now everyone is trying to understand what kind of exposure the auto makers have to Mexico.”

So far this week, primary supply has reached just US$1.1bn from two deals - a US$500m 10-year from CNO Financial and a US$600m 8.5-year non-call three from GoDaddy.

That makes for the slowest week this year, surpassing the first week of January when just US$1.5bn hit the market.

This follows another surge in outflows from high-yield funds, which saw US$1.27bn head for the exits during the week ending May 29, according to Lipper.

STRUCTURED FINANCE

Solar company Sunrun is a rare bright spot on this Friday morning as renewed US trade war threats against Mexico cast a shadow over markets.

The residential solar installer is due to price its US$204m securitization this afternoon, its first of the year.

Credit Suisse structured the 6.83-year Single A- rated trade and released guidance yesterday in the 205bp-2015bp range over iSwaps.

San Francisco-based Sunrun last sold an ABS offering in December at 265bps over iSwaps, but with a longer 9.57-year tenor.

More ABS on the docket for next week will test investor tolerance for taking up bonds backed by auto loans, student debt and cellphone payment plans.

There will also be ample supply on the mortgage front, which some analysts have recommended as a haven in the latest trade war storm.

“Given the potential for additional risk-off moves to take place over the near-term, we continue to recommend that investors move a portion of their IG corporate holdings into AAA CMBS as a short-term “safe-harbor” trade,” Scott Buchta, Brean Capital’s head of fixed-income strategy, wrote this morning.

LATAM

News of a potential trade war between Mexico and the United States closed the week in LatAm after the primary market saw some US$3bn equivalent in supply.

Fears over an intensifying trade war will likely dampen issuance into next week, not to mention secondary spreads.

“There will be a large impact on everything in Mexico, nobody will be spared,” said a banker.

This follows issuance from the Dominican Republic and Brazil’s Ultrapar this week. The former raised a total of US$2.5bn equivalent through a 30-year dollar bond and a local currency tranche.

The 30-year was being quoted at 98.85-99.15 on Friday morning after printing at 98.791 earlier this week on books of over US$4bn.

“Dominican Republic’s 30-year did quite well. They left a little bit of concession on the table but the note rallied about 5bp despite the moves in Treasuries,” said a syndicate banker following the deal.

Overall, emerging markets funds held up relatively well, seeing net outflows of just US$5.028m, according to Lipper data.

EQUITIES

Twilio, the communications platform-as-a-service company, loaded up its balance sheet with US$870m raised from an upsized stock sale Thursday.

JP Morgan and Goldman Sachs priced 7m shares at US$124.00 apiece, a 2.3% discount to last sale and relatively light work in the context of one-day’s trading volume.

The banks upsized the offering from the US$750m fixed-size targeted at launch.

Twilio plans to use proceeds for general corporate purposes, including potential acquisitions.

Eversource Energy, a regulated electric utility, powered into the market with US$1.1bn equity offering overnight Thursday.

Goldman Sachs and Barclays shared risk on the sale of 15.6m shares at US$72.50, the high end of a US$71.75–$72.50 reoffer range and 0.9% discount to last sale.

Eversource is using proceeds to help fund the US$13bn it expects to spend on capital expenditures over the next five years. The utility previously communicated it would issue US$2bn of equity publicly.

To manage equity dilution, Eversource sold 3.64m shares directly into the market and another 11.96m shares that were borrowed from existing investors. The forward purchase agreement can be settled by physically delivering stock at any point over the next year.

Myovant Sciences, a biotech focused on women’s health diseases, saw its shares tumble 25.1% Thursday while marketing a fixed-size US$100m equity offering.

Despite that hefty hit, the company accepted pricing on 15.15m shares at US$8.25, an additional 8.2% discount to last sale, to increase the offering size to US$125m.

JP Morgan, Goldman Sachs, Cowen and Evercore were joint bookrunners.

Myovant plans to use proceeds for a Phase III trial of its uterine fibroids drug.

Amicus Therapeutics landed US$175m on an upsized stock offering, but also paid a heavy cost.

JP Morgan, Goldman Sachs and SVB Leerink, which had marketed the offering for one day Thursday at a fixed, US$150m target, placed 16.3m shares at US$10.75 each, a 12% all-in discount to pre-marketing levels.

Amicus is using proceeds to fund drug trials on gene therapy treatments for rare diseases under a collaboration with the University of Pennsylvania.