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MORNING CALL: May, We Have Some More?

By Ken Jaques May 7 2024

It sure looks like it. Totally convinced that inflation is coming under control and the economy is slowing down, which puts at least one rate cut this year back on the table, has the broader financial markets back on solid footing, with the futures indicating the Dow could be headed for its fifth straight day of gains, and Treasury yields heading lower on their own five-day streak.

While modest, futures are indicating a positive open for the Dow, which closed 177 points higher, though the S&P500, which closed 1.03% higher and the Nasdaq, which closed 1.19% in the green, are hovering just below the flatline this morning. However, the benchmark 10yr note, which closed at 4.49%, is trading 3bp lower this morning at 4.46%, a level not seen in a month.

Meanwhile the long bond yield dropped 3bp overnight to 4.61%, while the 2yr note, the most susceptible to the vagaries of inflation and its impact on underlying interest rates, saw its yield fall 1bp to 4.81%, whereas only a week earlier it was trading at 5.04%. Corporate spreads also tightened overnight, the fourth straight day of tightening. The average high grade bond is now trading 88bp over comparable Treasuries, its tightest level of the year, and tightest spreads have been in nearly three years.

In general, the markets have been encouraged by recent economic data, the latest being the nonfarm payrolls data that showed that job growth came in below expectations in April and unemployment ticked higher. The results alleviated concerns that the economy was too hot and raised optimism around rate cuts from the Fed.

Needless to say, positive sentiment is always good for the high grade primary market. So much so that 14 ex-SSA issuers, the most we have seen in one day in nearly two months, descended on the market, raising $13.6bln in the process. Spearheaded by a $3bln 3-pt offering from Coca-Cola, yesterday s borrowers raised nearly half of what the Street had projected ($30bln) for the week. Yesterday s haul also brought issuance for the month, which is only four days old, to $17.8bln.

Now, the month of May is typically a very busy month for high grade issuance, consistently ranking as the third most prolific issuance month of the year, averaging $143.953bln over the past decade. We have seen as much as $248.59bln (2020), but as little as $86.81bln (2022) come to market in the month of May.

However, this May, the Street, on average, is looking for a rather tame $125bln in ex-SSA issuance to come to market. The lowest estimate came in at an even $100bln, while the highest estimate of $135bln was still below the 10-year average. However, there is always the possibility that a huge backlog of M&A-related transactions could give a boost to those estimates.

Until then, investors appear to be content with whatever comes to market in the interim. While the average NIC of 2.74bp on last week s deals was a little above the year-to-date average of 2.08bp, the deals contracted an average of 31bp from IPT/PX, compared to the y-t-d average of 26.6bp, and the oversubscription rate was 5.58x, quite a bit above the yearly average of 4x. Yesterday s metrics were similar, compressing 28.2bp from IPT/PX, while attracting $57bln in investor interest (4.19x covered), and pricing with an impressive average NIC of 0.68bp.

Once again, in the never ending hunt for yield, buyers gravitated to another subordinated offering. Dominion Energy raised $2bln through a 2-pt offering of 30.75nc5.5 and 30nc9.75 junior subordinated notes that came in 50bp from IPT/PX and built a book of $9.4bln (4.7x covered).

While yesterday s docket consisted solely of domestic offerings, so far today s roster includes two ex-SSA Yankee and three SSA offerings. Standard Chartered is in the market with a 3-pt offering of 4nc3 fixed and/or floating rate notes and 11nc10 fixed rate securities, while NatWest Group will be looking to sell perpnc10 AT1 subordinated notes. As for the SSAs, BOC Aviation is looking to sell 5yr global MTNS, along with Korea Expressway who is in the market with a 3yr note offering. Lastly, the Republic of the Philippines is marketing a 2-pt offering of 10yr and 25yr sustainability bonds. But we don t expect that to be the extent of ex-SSA issuance today as we ve been told there are at least six more potential borrowers mulling over their options this morning.

It sure looks like it. Totally convinced that inflation is coming under control and the economy is slowing down, which puts at least one rate cut this year back on the table, has the broader financial markets back on solid footing, with the futures indicating the Dow could be headed for its fifth straight day of gains, and Treasury yields heading lower on their own five-day streak.

While modest, futures are indicating a positive open for the Dow, which closed 177 points higher, though the S&P500, which closed 1.03% higher and the Nasdaq, which closed 1.19% in the green, are hovering just below the flatline this morning. However, the benchmark 10yr note, which closed at 4.49%, is trading 3bp lower this morning at 4.46%, a level not seen in a month.

Meanwhile the long bond yield dropped 3bp overnight to 4.61%, while the 2yr note, the most susceptible to the vagaries of inflation and its impact on underlying interest rates, saw its yield fall 1bp to 4.81%, whereas only a week earlier it was trading at 5.04%. Corporate spreads also tightened overnight, the fourth straight day of tightening. The average high grade bond is now trading 88bp over comparable Treasuries, its tightest level of the year, and tightest spreads have been in nearly three years.

In general, the markets have been encouraged by recent economic data, the latest being the nonfarm payrolls data that showed that job growth came in below expectations in April and unemployment ticked higher. The results alleviated concerns that the economy was too hot and raised optimism around rate cuts from the Fed.

Needless to say, positive sentiment is always good for the high grade primary market. So much so that 14 ex-SSA issuers, the most we have seen in one day in nearly two months, descended on the market, raising $13.6bln in the process. Spearheaded by a $3bln 3-pt offering from Coca-Cola, yesterday s borrowers raised nearly half of what the Street had projected ($30bln) for the week. Yesterday s haul also brought issuance for the month, which is only four days old, to $17.8bln.

Now, the month of May is typically a very busy month for high grade issuance, consistently ranking as the third most prolific issuance month of the year, averaging $143.953bln over the past decade. We have seen as much as $248.59bln (2020), but as little as $86.81bln (2022) come to market in the month of May.

However, this May, the Street, on average, is looking for a rather tame $125bln in ex-SSA issuance to come to market. The lowest estimate came in at an even $100bln, while the highest estimate of $135bln was still below the 10-year average. However, there is always the possibility that a huge backlog of M&A-related transactions could give a boost to those estimates.

Until then, investors appear to be content with whatever comes to market in the interim. While the average NIC of 2.74bp on last week s deals was a little above the year-to-date average of 2.08bp, the deals contracted an average of 31bp from IPT/PX, compared to the y-t-d average of 26.6bp, and the oversubscription rate was 5.58x, quite a bit above the yearly average of 4x. Yesterday s metrics were similar, compressing 28.2bp from IPT/PX, while attracting $57bln in investor interest (4.19x covered), and pricing with an impressive average NIC of 0.68bp.

Once again, in the never ending hunt for yield, buyers gravitated to another subordinated offering. Dominion Energy raised $2bln through a 2-pt offering of 30.75nc5.5 and 30nc9.75 junior subordinated notes that came in 50bp from IPT/PX and built a book of $9.4bln (4.7x covered).

While yesterday s docket consisted solely of domestic offerings, so far today s roster includes two ex-SSA Yankee and three SSA offerings. Standard Chartered is in the market with a 3-pt offering of 4nc3 fixed and/or floating rate notes and 11nc10 fixed rate securities, while NatWest Group will be looking to sell perpnc10 AT1 subordinated notes. As for the SSAs, BOC Aviation is looking to sell 5yr global MTNS, along with Korea Expressway who is in the market with a 3yr note offering. Lastly, the Republic of the Philippines is marketing a 2-pt offering of 10yr and 25yr sustainability bonds. But we don t expect that to be the extent of ex-SSA issuance today as we ve been told there are at least six more potential borrowers mulling over their options this morning.

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