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Saturday, 16 December 2017

US high-grade bond market sets new quarter record

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The US investment-grade bond market on Tuesday set a new issuance record for a single quarter of US$370.4bn, as investors continue to snap up corporate debt at a breakneck pace.

With eight trading days still to go, the market surged past the previous record of US$363bn set in Q2 2015, according to IFR data.

There appears to be no limit to investor demand, even as issuers pile into the new issue market to raise money at historically low rates.

“There is a ton of money sloshing around,” said a buyside corporate bond trader.

“Guys are just bringing deals to market and they are printing with very little concession. It is just working in the issuers’ favor.”

Bankers said many issuers had pulled deals forward this year because of the expectation that funding costs would rise after interest rate hikes by the Federal Reserve.

But even after the Fed finally hiked rates last week, borrowers remain able to raise fresh debt at ultra-low levels, while investors show they have plenty of cash to put to work.

Deals from foreign borrowers - especially banks - have been a big driver of issuance this year, as has issuance from domestic US banks looking to meet regulatory requirements.

“The currency basis continues to be constructive,” one DCM banker said. “For people looking from overseas, the dollar market continues to be the place to get duration and size.”

The pace of issuance has fluctuated this year, but deals have come thick and fast during periods of primary market activity, leaving investors scrambling to buy paper.

“It’s not been a wall of supply that has been constant,” said Jason Shoup, senior portfolio manager at Legal & General Investment Management America.

“It’s been peaks and troughs. That is somewhat confusing to digest as a market participant.”

After January became the second biggest month for high-grade ever, with US$176.4bn of issuance, volumes dropped to US$91.1bn in February - lower than the February volumes in 2015 and 2016.

With uncertainty last year surrounding the US presidential election, many in the market had expected things to cool down in 2017 after six consecutive record years of issuance.

But the opposite has happened, with the primary continuing to move from strength to strength - even with a rates hike making the cost of borrowing more expensive.

“The surge in primary is related to three things,” said Mark Howard, head of US credit strategy at BNP Paribas.

“Renewed confidence in the financial sector; concern about higher rates, which has led to a desire to bring issuance forward; and improved economic growth prospects, which are bringing out the animal spirits.”

Nine high-grade deals in total were in the market on Tuesday, including a US$4bn offering from Dutch bank ING and a US$1.5bn covered bond from Norwegian lender DNB Boligkreditt.

Medical device maker Medtronic sold a US$2bn three-part deal. Other notable names included BlackRock, Glencore and Shinhan Bank.

 

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