IFR SNAPSHOT - What a difference a data release makes
Another inflation report out this morning, the softer-than-expected PPI, had a decidedly different impact on markets than did yesterday's disruptive CPI release.
Meanwhile, corporate primaries are still muddling through market ructions, with the high-yield arena expecting two offerings and the investment-grade primary looking at three issues today. The LatAm sector is also eyeing a sovereign offering from El Salvador. Meanwhile, IPOs are rolling out in equities.
With PPI out of the way, markets went about their work with a little more bounce in their steps. The US Treasury benchmark 10-year note yield came off its high of 4.59% just before the data release at 8:30am New York time, falling to 4.53%. US stock futures turned positive and then opened moderately higher.
"This is an inflation update that will offer some relief after yesterday's troubling CPI figures," BMO said in a report today.
The cooler PPI report follows the hot CPI release on Wednesday that roiled markets and clamped down on rate-cut expectations.
"Markets saw an aggressive selloff yesterday, as another upside surprise in US inflation meant bonds and equities both slumped," Deutsche Bank Research said in a report today. "That included the biggest daily rise in the 10yr Treasury yield (+18.2bps) since September 2022."
US equities slumped and the S&P 500 fell 0.95%, Deutsche said. "That also means the index is negative on a 4-week basis again, which just shows how the incredibly fast rally from November to March has stalled."
The main takeaway from the report was a 0.4% monthly print for core CPI in March, contrary to expectations for a slowdown to 0.3%, Deutsche Bank said.
"But the bigger picture is that this is now the third consecutive month that core CPI has been at +0.4%," Deutsche Bank said. "So it’s getting increasingly difficult to dismiss this as just a temporary bump, and the major concern is that inflation is ending up sticky above the Fed’s target."
Investors are pushing out the likely timing of rate cuts until later in the year, and pricing in a more hawkish policy stance ahead, Deutsche said. This upside inflation surprise has led to a big reassessment about the chance of rate cuts this year, with investors questioning if the Fed can still cut if inflation remains this persistent, the bank said.
This morning the CME FedWatch forecasted a probability of 19.5% for a fed funds rate cut on June 12, well below the 59.1% probability forecast last week.
On Wednesday one IG offering was priced totaling US$500m, lifting weekly IG issuance to US$16.23bn and April IG volume to US$40.23bn, according to IFR data.
No offerings were priced in the HY primary yesterday.
The average IG bond spread edged in by 2bp to 89bp on Wednesday and the HY bond spread tightened by 4bp to 310bp, according to ICE BofA data.
"High grade spreads narrowed 1-2bp during yesterday’s session, establishing new YTD lows in the process," BMO said. "Spreads now sit at their lowest levels since Q4:21 and just 3-5bp off the post financial crisis lows of 2021 depending on index selection."
The outperformance of corporate bonds has been thematic this year, BMO said, with IG spreads narrowing more than would be expected in the context of other assets sensitive to risk.
HIGH GRADE
At least three investment-grade bond offerings are expected to price on Thursday.
Alternative asset manager Blue Owl is issuing a 10-year senior unsecured note. Active leads Bank of America, Goldman Sachs, JP Morgan, Truist and Wells Fargo set IPTs at Treasuries plus 215bp area. The proceeds will be used to pay down borrowings under its revolver.
Investment bank Jefferies is also in the market with a 10-year senior bond. The US dollar issuance follows an outing in the European bond market where it raised €1.25bn.
German energy company RWE is selling 10 and 30-year senior unsecured notes in a green bond format.
LEVERAGE/HIGH YIELD
Endo and Transocean have the market to themselves on Thursday as they prepare to price deals today amid a shakier backdrop for credit.
Endo has released price talk of 8.50%-8.75% on a seven-year non-call three offering, which has been downsized to US$1bn from US$1.25bn.
The deal is part of a larger financing package to support the drug makers's exit from bankruptcy. An accompanying term loan B has been upsized to US$1.5bn from US$1.25bn.
Transocean, meanwhile, is looking to raise US$1.5bn today through a two-tranche deal comprising a five-year non-call two offering and a seven-year non-call three bond. The offshore drilling services provider will use proceeds to fund a tender for bonds maturing in 2025 and 2027.
EquipmentShare.com has also announced initial price thoughts of 8.75%-9% on a eight-year non-call three deal ahead of pricing on Friday. The equipment rental company is using proceeds to pay down debt.
STRUCTURED FINANCE
ABS dealmakers are shifting their focus on next week's supply now that most of this week's offerings are in the books.
Yesterday, several issuers began marketing their deals for next week. Santander returned with a US$1.48bn subprime auto securitization, while Daimler mandated a US$637m truck loan deal.
This morning, used car dealer CarMax is preparing to raise US$1.2bn with its second prime auto ABS of the year.
Another upcoming ABS transaction is a US$500m securitization from Sotheby's Financial Services, the first-of-its-kind deal backed by fine art and collectibles.
Since Monday, 10 asset-backed issuers have raised more than US$5.9bn, already surpassing last week's total of US$3.3bn, IFR data show.
Meanwhile, at least four RMBS offerings are slated to price by Friday, led by three non-QM deals from Invictus Capital, MFA Financial and A&D Mortgage.
Kiavi is in the market with a US$300m securitization backed by residential transition mortgages, also known as fix-and-flip loans.
LATAM
El Salvador is expected to price a two-tranche offering as soon as today as it seeks to fund a tender for its 2025, 2027 and 2029 bonds.
The Central American country is offering an amortizing bond due 2030 and an interest-only security whose coupon steps up if the sovereign fails to cut a deal with the IMF or doesn't get upgraded to B2/B in the next 18 months.
This comes after Engie Energia Chile raised US$500m yesterday through a 10-year green bond that priced with a 6.35% coupon to yield 6.52% or US Treasuries plus 197bp.
EQUITIES
PACS overcame the mixed record of larger healthcare offerings to price an upsized US$450m NYSE IPO late Wednesday.
A syndicate led by Citigroup, JP Morgan and Truist Securities priced the sale of 21.4m shares in the nursing home operator at US$21, the middle of the US$20-$22 marketing range. The terms give PACS an enterprise value of US$3.5bn.
The banks previously told investors to expect pricing in the upper half of the range after closing the order book multiple times covered.
Even after opting for the midpoint, they still increased the offering size by about 12% from 19.1m shares at launch, reflecting demand from long-only investors and even some REIT-dedicated funds eyeing the company’s real estate portfolio.
The offering was pitched at a 30% discount to Ensign, a rival nursing home operator and the lone public comp trading at 13.5-times 2024 EV/Ebitda.
Shares of PACS will begin trading on the NYSE later on Thursday under the symbol “PACS”.
UL Solutions follows later on Thursday with its up to US$812m NYSE IPO. The offering will enable the product testing and certification firm’s nonprofit parent to cut its stake to 86%.
The syndicate, led by Goldman Sachs, JP Morgan, Bank of America, Citigroup, Jefferies and UBS, closed the order book well covered late Wednesday.
The group's message for UL’s sale of 28m shares at US$26–$29 is unchanged from previous guidance.
Though there is no price sensitivity in the book, the IPO is expected to price in the upper half of the marketing range.