[MORNING CALL:] Change of Heart

When we first conducted our weekly issuance poll on Thursday, word on the Street was that, on average, we would see $27.5bln come to market in the ex-SSA primary market this week. The most pessimistic of the respondents was looking for no more than $22.5bln to cross the tape, while the most optimistic of the bunch sees $37.5bln coming to market this week. However, given the rally in the Treasury market on Friday – the benchmark 10yr saw its yield fall 19bp to 3.80%, while the long bond yield fell 16bp to 4.11%, and the 2yr outdid them both, falling 28bp to close at - the respondents to our weekly poll had a change of heart. The average estimate for this week now comes in at $37.5bln, with a range of guesses from a low of $25bln, to a high of $50bln, though, needless to say, there were no new deals announced overnight.

That also had them rethinking their projections for the month as well. Whereas the initial results had the average estimate around $80bln, with a low of $75bln, and a high of $95bln. Those estimates were revised to a range of estimates from a low of $80bln, to a high of $110bln, with an average guess of $90bln., a bit higher than the 10yr average issuance for the month of August of $87.85bln. Over the last decade we have seen as much as $140bln (2020) cross the tape in August, though we have also seen as little as $42bln (2014) come to market in the month of August – that’s why they call them “the dog days of summer. Last August, 44 borrowers raised $68.1bln, far below the 10yr average.

This August actually got off to a decent start with seven borrowers raising $8.825bln on Thursday. That brought ex-SSA issuance for the week, despite the thirteenth "zero" ex-SSA issuance day of the year on Wednesday, to $31.125bln, topping the average weekly estimate of $27bln for the twenty-third time this year. While last week’s deals metrics didn’t really live up to recent standards – the 23 deals (39 tranches) priced last week contracted 23.4bp from IPT/PX; were 2.97x covered; and priced with an average NIC of 4.9bp – things got even worse in the secondary market where only one, DTE Energy's $1.2bln 3yr deal was able to tighten (-1bp) in the secondary market, while two issues, Mercedes-Benz Finance NA's $750m and Citibank NA's $1bln 2yr floaters, were trading unchanged. The rest were all trading wider by an average of 4.9bp. Even Netflix' $1.8bln 2-pt deal, which was nearly 10x oversubscribed and priced with an NIC or -10bp, is trading 3bp wider in the aftermarket.

But it might have more to do with the drop in Treasury yields than the deals actually trading wider. As previously mentioned, Treasuries staged a huge rally on Friday after the latest jobs report showed that hiring in July has slowed more than expected (114k vs 175k), and the unemployment rate rose from 4.1% to 4.3%. That fueled investors’ fears that the Fed has waited too long to curb interest rates, and that the slowdown in the economy may be leading to a recession. That sent the major averages reeling, which also added to the rally in Treasuries as investors sought safer havens. The Dow fell 600 points, while the S&P500 and the Nasdaq fell 1.84% and 2.43%, respectively.

Last week, the Dow snapped a four-week win streak, falling 2%, while the S&P500 posted a third straight losing week, also down 2% for the week. Meanwhile, the Nasdaq capped off a third straight week of losses, bringing the tech-heavy index down more than 10% from a record set last month. And, by the looks of it, there doesn’t seem to be any let up in sight if one is to put their faith in the futures market which are indicating a more than 800-point decline in the Dow, while the S&P500 (-2.94%) and the Nasdaq (-4.41%) also appear to be headed for much lower openings as the global selloff continued over the weekend.

“It’s almost as if the market is saying to the Fed, you should have cut rates last week, so now we’re going to force you to make an emergency cut or cuts to stem off the possibility of a recession,” said one market strategist. “The FED will need to react really fast to avoid a meltdown that could make 2008 look like a joke,” commented one analyst. “It’s an election year. I’m expecting emergency action.” Bond traders are piling into bets (60%) that the US economy is on the verge of deteriorating so quickly that the Fed will need to start easing monetary policy aggressively vis-à-vis an emergency cut to head off a recession, of which Goldman Sachs’ economists say there’s a 25% chance.

Treasury yields on the continued to fall over the weekend, with the benchmark 10yr note now trading at its lowest level (3.74%) of the year, and its lowest level since June of last year. The long bond yield (4.07%) hasn’t been this low since the first trading day of the year, while the 2yr yield (3.75%) hasn’t been this low since September of 2022. However, corporate spreads paid the price for the Treasury rally, with the average high grade bond now trading 106bp over comparable Treasuries, 11bp wider on the week.

On the economic front, The July ISM Services PMI, which measures the performance of services companies, is expected to show a rise to 51.0 from 48.8 previously.

As previously mentioned, there were new deals announced overnight, though there are at least two possibilities for today. DR Horton and Borgwarner wrapped up investor calls last week in anticipation of tapping the US public debt market, though along with eight others, decided better of it this morning.

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