[MORNING CALL:] Moving Right Along

While yesterday belonged to President-elect Donald Trump, today belongs to Federal Reserve Chairman Jerome Powell as the Fed wraps up its two-day policy meeting. Unlike the election results, the Fed’s monetary policy decision will be somewhat anticlimactic. It is widely expected (99%) that the Fed will adhere to its business plan and lower interest rates by 25bp, while the chairman will dance around questions surrounding the expectations for the future in light of the Trump victory. Trump’s agenda of tax cuts, higher spending and aggressive tariffs could have a meaningful impact on the Fed’s plans to control inflation, which could be reignited by another round of isolationist economic moves.

Of more interest to the markets will be what Powell has to say about the committee’s plans for the future. Right now, the markets are leaning towards (71.1%) another 25bp rate cut next month. However, there are those that believe the Street is expecting too much from the Fed. A resilient economy and sticky inflation may prompt the Fed to hit the brakes after this week’s meeting. Just last week Blackrock CEO Larry Fink said, “I do believe we have greater embedded inflation in the world than we’ve ever seen and we’re not going to see interest rates as low as people are forecasting.”

In any event, while we may not see another high-grade corporate bond deal this week – there has only been one, Videotron Ltd’s $700m 10yr note offering priced on Monday and there were no deals announced overnight – next week could be quite a different story, at least according to the syndicate desks we spoke with yesterday. Now that the question of who will lead the government for the next four years has been answered, corporate borrowers may return to the market next week with a vengeance.

Why? Well, (1) the bulk of quarterly earnings reporting is out of the way, freeing up those companies who have been handcuffed by earnings blackouts. (2) it’s apparent that concerns that we could be faced with a rising fiscal deficit, along with a potential global trade war will lead to higher inflation and surging bond yields – the benchmark 10yr note tacked on 15bp yesterday - along with gains in the stock market – all three major averages closed at new all-time record highs – could prompt prospective borrowers to tap the primary market before rates go even higher. (3) There are still a number of M&A deals that need to be funded, and sooner rather than later, seems to be the preferred course of action. (4) High-grade corporate spreads (+80bp) are the tightest they have been in nearly 20 years (+79bp/2005).

Another reason we could see high-grade new issuance blossom next week – unofficially the Street is looking for roughly $30-35bln to cross the tape next week despite it being just a four-day work week - is the possibility of a sizeable deal from Apple. The company filed a debt securities shelf last Friday with the proceeds for general corporate purposes including stock buybacks, dividends, capex, acquisitions and repayment of debt. Apple last tapped the US public debt market in May of last year, raising $5.25bln via a 5-pt offering for the same purposes.

There are also whispers that one or more large financial concerns could take advantage of not only a rally in their share prices – the banks stand to benefit from higher interest rates and the possibility of deregulation – but in the trading of their outstanding bonds in the secondary market and tap the market next week.

As for market conditions this morning, futures are indicating an attempt to build on yesterday’s Trump rally with the three major averages in the green. This after the Dow closed up 1,400 points, while the S&P500 traded 2.42% higher and the Nasdaq rallied 2.79%. All three closed at new all-time record highs. Even the crypto market got into the act, with Bitcoin closing above $75,000 for the first time in history. However, amid the euphoria, the stock market and the crypto gains were the Treasury and gold markets losses as investors shifted from safe haven assets into riskier investments.

The benchmark 10yr note yield jumped 16bp to close at 4.42%, its highest level since the end of June. Meanwhile, the long bond saw its yield rise 15bp to close at 4.61%, while the 2yr note yield closed 8bp higher at 4.27%. Apparently, that was enough, since all three were virtually unchanged overnight. As previously mentioned, the rise in Treasury yields gave way to a tightening of corporate spreads. The average high-grade bond is now trading at 80bp over comparable Treasuries after tightening 4bp yesterday. The last time spreads were this tight was back in 2005, when the average high-grade bond was trading 79bp over comparable Treasuries. In case you were wondering, according to our records, the tightest credit spreads have ever gotten was +54bp back in 1997.

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2024 HIGH GRADE ISSUANCE - 11/04 WEEK, NOVEMBER & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - RECENT MANDATES

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