[MORNING CALL:] A Pause in the Action?

It appears exuberance over the red wave victory has dissipated somewhat, as futures are indicating yet another down day for the three major averages. And if it holds, the S&P500 will actually end lower on the week. This after the Dow dropped a little more than 200 points yesterday, dragging the S&P500 (-0.6%) and the Nasdaq (-0.64%) along with it after Fed Chairman Powell hinted that the strength of the economy could warrant some patience with future rate cuts.

“The strength we are currently seeing in the economy gives us the ability to approach our decisions more carefully,” Powell said. October’s read on the produce price index came in more or less in line with expectations, though still indicated that inflation is still hanging around.

Powell’s comments prompted traders in the Fed Funds futures market to reduce their odds of a 25bp rate cut next month to 62.4% from 72.2% a day earlier. However, aside from the short end of the curve – the 2yr note saw its yield jump 7bp on the day, closing at 4.34% - the rest of the Treasury market took Powell’s comments in stride. The benchmark 10yr note, which was already higher by 14bp on the week, closed at 4.43%, 1bp lower, while the long bond yield slipped 7bp to close at 4.58%. This morning there looks to be a bit of a reversal, with the 2yr note yield inching lower to 4.31%, while the long bond yield is 2bp higher at 4.60%. The benchmark 10yr note, however, is unchanged at 4.43%.

Corporate spreads widened for the second straight day to where the average high-grade bond is now trading 80bp over comparable Treasuries. But that hasn’t deterred corporate issuers from continuing to tap the primary market. Whereas would be borrowers took a back seat to the broader markets last week postelection – 3 deals/3 tranches/$1.9bln), they were front and center this week – 26 deals/52 tranches/$46.34bln – we’re not expecting anything to price today, though one never knows.

That was enough to (1) top all weekly estimates, including the highest one of $40bln and (2) rank this week as the tenth busiest ex-SSA issuance week of the year – a four-day week no less. That brought issuance for the month to $48.25bln as we reached the midpoint of November. If you recall, coming into this month, the Street thought, on average, we could see $70bln in new supply, with the educated guesses ranging from a low of $50bln, to a high of $90bln.

Historically, the month of November ranks as the sixth most prolific issuance month of the year, with an average output of $101.1bln over the last decade. We have seen as much as $118.229bln (2017), and as little as $74.41bln (2019) come to market in the penultimate month of the year.

After being held in check last week by the Presidential election, the Fed’s interest rate decision and the last remnants of earnings blackouts, high grade corporate borrowers made up for lost time on Tuesday, 13 issuers flooding the market with $30.15bln in supply. That made Tuesday (1) the third busiest ex-SSA issuance day of the year and (2) the most high-grade issuance we have seen in one session since the day after Labor Day.

It was the banks, since they have the most to gain from rising interest rates, both foreign and domestic, who led the charge, with HSBC out in front of the onslaught, raising $6.5bln via two separate offerings. Two of the “big six” banks also got into the act. Citibank/Citigroup, in its eighth trip to the US public debt market this year, raised $4.25bln, while Goldman Sachs raised $3bln in its ninth visit of 2024 to the primary market. So far this year Citigroup has raised $30.7bln, while Goldman has raised $20.25bln. Combined, the “big six” have been responsible for $10.28% ($145.45bln) of the year-to-date ex-SSA issuance total.

Whereas Tuesday ($11.5bln) was dominated by FIG borrowers, it was the corporate/industrial complex that provided the bulk of Wednesday’s issuance, spearheaded by Gilead Sciences’ $3.5bln 4-pt offering, followed closely by Cardinal Health’s $2.9bln 4-pt M&A-related deal, with the proceeds going to help fund the company’s $3.9bln acquisition of GIA & Advanced Diabetes Group.

That brought the number of M&A-related deals priced this year to 42 which have raised $166.5bln, or 11.66% of the year-to-date ex-SSA issuance volume. Last year M&A-related deals accounted for 10.43% (32 deals totaling $126.15bln) of 2023’s total volume.

Yesterday’s fare ($4.7bln) was made up mostly of the latest darling of the high-grade world – subordinated debt hybrids, as investors have never abandoned that never ending quest for yield. There have been 90 such deals this year ($96bln), nine priced this week this week alone, as compared to 36, all last year ($45.35bln). Not only that. On average, subordinated deals have contract anywhere from 35bp to 50bp, while senior unsecured debt averages 25bp to 28bp. The average sub deal coverage this week came in above 4.6x, while higher-rated bonds average 3.36x.

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2024 HIGH GRADE ISSUANCE - 11/11 WEEK, NOVEMBER & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - RECENT MANDATES

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2024 HIGH GRADE ISSUANCE - 11/14 PRICINGS

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