[MORNING CALL:] Forward Thinking

Apparently, the meltdown in the equity markets yesterday the Dow closed 504 lower, while the S&P500 and the Nasdaq plummeted 2.31% and 3.64%, respectively - ignited somewhat of a flight to safety overnight as yields fell along the curve in the Treasury market, though corporate spreads blew out. Further signs of a slowing economy - manufacturing data (49.5 vs 51.6) and new home sales (-0.6% vs 3.4%) also had something to do with the rally as the likelihood of one or more interest rate cuts becomes more of a reality. Traders in the Fed Funds futures market are penciling in the odds of a cut in September at 78.4%, with a 58.8% chance of a subsequent cut in November. As a matter of fact, Fed President William Dudley thinks the central bank should cut rates as soon as next week when the committee meets. Then there are those economists who are speculating that the first cut (September) could be 50bp.

In any event, the benchmark 10yr note, which closed at 4.28%, rallied 6bp overnight to 4.22%, while the long bond saw its yield fall 5bp to 4.49%. But the sharpest move was in the short end where the 2yr note, the most susceptible to the vagaries of underlying interest rates, is now trading at 4.36%, 14bp lower on the week.

And it all started after the equity markets plunged on disappointing earnings results from some of the more notable names in the business, especially the tech business, despite an earnings season that is off to a fairly strong start, just not from the right names. Twenty-five percent of S&P500 components have reported earnings with roughly 80% topping analysts expectations. But just because you beat estimates, which are usually on the conservative side, doesn t necessarily mean a boost in your share price since investors are a fickle lot, and the market is a demanding mistress.

Case in point, Alphabet reported quarterly earnings that beat on both the top and bottom lines, only to see its share price decline 4% on disappointing ad revenues. Then there s the guilt by association factor. The selloff in Tesla (12%) and Alphabet (4%) also dragged down shares of Meta (-3%), Nvidia (-3%) and Microsoft (-2%).

While the background noise in the broader markets may have had some impact on high grade corporate issuance only three borrowers tapped the market for $4.45bln yesterday in the overall scheme of things, high grade issuance, though slowing, is alive and well. Now, there are some who believe issuance will begin to taper as the summer drags on and the closer we get to the presidential election in November, though that could be good news in the near term for investors, since many potential borrowers are likely to accelerate their financing plans while they have a receptive audience and tight spreads, ahead of the expected volatility that goes along with the run up to the election itself.

However, we have seen no such summer slowdown so far. June produced $102.6bln in ex-SSA issuance, matching its 10yr average and July has already seen $103.204bln come to market, only the third time in history July issuance has topped the century market, and making this month the busiest issuance July since $120.33bln priced back in July of 2017. Many would-be borrowers have pulled their financing forward to take advantage of (1) some of the tightest spreads we have seen in three years (2) investors flush with cash that is burning a hole in their pocket as they anticipate lower interest rates on the horizon (3) and the relative calm in the market ahead of the expected volatility that goes along with the run up to what could be a contentious presidential election.

That sort of thinking has already overheated the ex-SSA issuance market. Year-to-date, ex-SSA issuance is running at a 26.5% ($986.663bln vs $780.16bln) quicker pace than last year and a 22.8% faster pace than 2022 ($803.61bln), and with scores of M&A financings needed to be done, there doesn t appear to be a let up in issuance in the immediate future. Last year there were 14 M&A-related transactions priced during the second half of the year raising $40.2bln in the process. While some have argued that the upcoming election could put many M&A deals on hold, in 2020, the last time we elected a president, 25 M&A-related deals were priced between July and December, totaling $82bln.

Be that as it may, there were no new deals announced overnight, and we re not expecting much activity in the primary market today as the Street awaits the latest on the economy (Q2 GDP/2.6% and the PCE Price Index/2.7%) and the labor market (initial jobless claims/238k). As previously mentioned, Treasuries rallied overnight and corporate spreads widened to where the average high grade bond is now trading 96bp over comparable Treasuries, the widest spread spreads have been in three weeks. Futures are indicating a continuation of yesterday s selloff, only on a much more modest scale.

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2024 HIGH GRADE ISSUANCE - 2024 VS 2023 COMPARISON

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2024 HIGH GRADE ISSUANCE - 07/22 WEEK, JULY & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - 7/25 CALENDAR

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2024 HIGH GRADE ISSUANCE - 7/24 PRICINGS

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