[MORNING CALL:] Fed in Focus

For only the ninth week this year, investment grade corporate issuance fell short of the Street's expectations. With five high grade borrowers tapping the primary market on Thursday, after two straight sessions that saw only two borrowers dip their toes in the water, brought issuance for the week to $29bln - from 25 borrowers - within a hair of the average weekly estimated of $30bln, still defying the odds of a summer slowdown.

However, last week's total did bring issuance for the month to $82.795bln, enough to top the lowest monthly estimate of $80bln, with borrowers setting their sights on the average monthly estimate of $90bln, with two weeks to go before the long Labor Day weekend. It also brought ex-SSA issuance for the year to $1.091.758bln (up 25.6%), within $8.3bln of the lowest yearly estimate of $1.100.000bln.

Most of last week's issuers saw their deals tighten in the secondary market. Entergy Texas' $350m 30yr first mortgage bonds (-10bp) and Cousins Properties' 500m 10yr REIT deal (-11bp) performed the best, while Boston Properties' 850m 10yr REIT deal (+05) didn't fare as well. The largest deal of the week, the aforementioned Eli Lilly $5bln 5-pt M&A-related deal, performed the best, seeing each tranche tighten by anywhere from 2bp (3yr) to 13bp (40yr), in what was clearly a duration play among investors.

As for this week, while we fully expect issuance to slow during the waning days of August, the Street came up with some fairly optimistic estimates. On average, the respondents to our weekly issuance poll are looking for somewhere in the area of $20bln to come to market this week, with a range of guesses from a low of $12.5bln, to a high of $25bln.

From what we’ve been told, the bulk of whatever issuance we see should come today and tomorrow, with six potential issuers weighing their options this morning. Among the possibilities is Devon Energy, who wrapped up investor calls last week. But we’ll have to wait at least one more day to see the possibility of a multi-tranche deal form Kroger, who is holding investor calls today.

To put things in perspective, the same week last year produced only $3.45bln from three ex-SSA borrowers. As a matter of fact, the last two weeks of August last year saw only four ex-SSA borrowers come to market, raising a total of $5.8bln in the process. However, seven SSA borrowers added $17.1bln to that two-week total - $10.6bln next week and $6.5bln during the last week of the month, and we have already seen two SSA borrowers – EIB (5yr global notes) and DBJ (3yr “sustainability” bonds) – announce plans to tap the market tomorrow.

However, there are some headwinds that could put issuance on a temporary hold. First, there’s the minutes of the most recent FOMC meeting which is supposed to confirm the Street’s hopes of a rate cut next month. Then there’s a handful of economic data to deal with, including manufacturing (49.8) and services (54.0) PMI, and ever present initial jobless claims (232k).

But first and foremost, will be Fed Chair Powell’s remarks at the annual Jackson Hole Symposium on Thursday, which is expected to give important cues to the market in terms of what should be expected in September. However, few expect Powell to give indications in terms of the size of the rate cut.

Traders in the Fed Funds futures market have backed off from their belief that the Fed could cut interest rates by 50bp next month, despite recent deflationary economic data to the contrary, citing the perception of panic on the part of the Fed if it moves to quickly. The odds of a 50bp cut have fallen to only 26.5% from 50% just a week ago, though the chances of a 25bp cut remain at 100%.

That has futures indicating a flat open for the three major indices, after the latest retail sales data sent the stock market skyrocketing, as investors regained some confidence in the economy, that had been seen as slowing to a crawl. That sent the three major indices soaring to above where they were before the market meltdown two weeks ago. Adding to the euphoria was a decline (227k vs 235k) in the number of initial jobless claims.

Traders in the Treasury market also appear to be biding their time ahead of the Fed minutes and Jackson Hole, with yields virtually unchanged from Friday’s close. The benchmark 10yr note is trading at 3.87%, 2bp lower than Friday’s close, as is the long bond (4.13%) while the 2yr note is trading 1bp lower at 4.05%. Corporate spreads are unchanged at 98bp over comparable Treasuries.

.

2024 HIGH GRADE ISSUANCE - 2024 VS 2023 COMPARISON

.

.

2024 HIGH GRADE ISSUANCE - 08/19 WEEK, AUGUST & 2024 ESTIMATES

.

.

2024 HIGH GRADE ISSUANCE - RECENT MANDATES

.

.

---- Subscribe to read more ----

To receive this analysis plus much more, subscribe to IGM. Request your free trial of the service today.