[MORNING CALL:] Oktoberfest?

Hardly! It may have been an uneventful day in the corporate issuance market on Friday, but the same cannot be said for the general market where a much better than expected September jobs report set the market on its ear. Stocks rallied and Treasury yields rose after data showed nonfarm payrolls grew by 254k jobs last month, trouncing economists’ expectations of only 150k gain. The unemployment rate ticked down to 4.1%, whereas economists were looking for no change. Though there are some who pointed to a low response rate from survey participants that could lead to downward revisions down the road.

Still, the latest data renewed faith that the economy remains resilient, supported by a healthy labor market and all but removed the fear of the economy plunging into a recession, which some say we are already in. After weeks of weak labor data, the data also renewed hopes that the economy is in for a soft landing. The geopolitical tensions in the Middle East, at least for the time being, were put on the back burner as the Dow rallied 316 points, while the S&P500 (+0.8%) and the Nasdaq (+1.06%) went along for the ride. All three indices managed to end the week on a positive note. The S&P500 finished the week up 0.22%, while the Dow inched higher by 0.09%. The Nasdaq eked out a 0.1% for the week.

However, the picture was not quite as pretty in the Treasury market. As a matter of fact, it was downright ugly. Across the curve, yields skyrocketed. The 2yr note, the most susceptible to the vagaries of underlying interest rates, saw it yield spike 23bp to close at 3.93%, its highest level in over six weeks. At the other end of the spectrum, the yield on the long bond jumped 8bp, closing at 4.26%, its highest level in two months. In between, the benchmark 10yr note yield popped 13bp to close out the week at 3.98%, like the long bond, a level not seen in two months.

Now that it appears good news is “good news” for the market again, the perception is that the Fed is more likely to cut interest rates at a slower pace and at smaller increments than the market had anticipated as recently as last week. Traders in the Fed Funds futures market - not the most accurate crystal ball – have the odds of a 50bp cut next month zero this morning, as opposed to 34.7% last week. The odds of only a 25bp cut now stand at 87.1%, up from 65.3% last week, with a small faction (12.1%) thinking the Fed may not cut rates at all in November.

While there were no high-grade deals priced on Friday, closing out a week that saw heightened tensions in the Middle East, a massive strike at the US ports (temporarily suspended after just three days), earnings blackouts, various holidays across Europe and Asia, the recovery from Hurricane Helene, and a bevy of economic data releases keep issuance to a bare minimum, there was a bit of good news, as corporate spreads tightened as Treasury yields rose. The average high-grade bond is now trading 87bp over comparable Treasuries, the tightest level of the year, and moving within 1bp of the decade low of +86bp (6/21).

With 15 issuers raising $15.45bln, last week became the sixth slowest issuance week of the year, and only the eleventh week this year that issuance failed to exceed the average estimate. However, it was a better first week of October than should have been expected since October is notorious for being a slow starter. This week last year produced a mere $8.9bln from 10 issuers, while the first week in October of 2022 saw 11 borrowers raise $13.55bln. Also, it was still enough to allow ex-SSA issuance for the year to rise above the $1.3trln mark ($1.301.608bln). That translates into a 28.8% increase in issuance from last year, whereas the Street, on average, was only looking for a 5.4% incremental rise in issuance at the beginning of the year. Even the most bullish were only looking for an uptick of 11%.

Part of the more-than-expected issuance can be traced to M&A-related transactions. Last Monday’s Darden deal brought the number of M&A-related new issues priced this year to 38 – there were 32 such transactions in 2023 - bringing the amount raised to $149.64bln, or 11.61% of the year’s ex-SSA volume. Last year, M&A-related deals accounted for 10.62% of total volume.

Now October is not known for robust corporate issuance. Over the past decade, the month of October has ranked as the fourth slowest ex-SSA issuance month of the year, seeing an average of $94.9bln in ex-SSA issuance cross the tape. We have seen as much as $122.29bln (2021) but also as little as $74.41bln (2019) in ex-SSA issuance come to market in October. Ex-SSA issuance in October has only broken through the century mark once in the last five years. This year, on average, the Street is looking for around $90bln in ex-SSA issuance to come to market this month, a little more than the five-year average ($88.7bln). The guesses for the month of October ranged from a bearish $75bln, to a bullish $115bln.

Faced with earnings blackouts and the possibility of an extended weekend ahead of the Columbus Day holiday. the Street does not have high hopes for a pickup in high grade issuance this week, with the average estimate coming in around $17bln. The most bullish of the bunch thinks we could see as much as $20bln price this week, while the bears think we won't see any more than $10-12bln cross the tape this week. However, the "big six" banks start reporting quarterly earnings this week with JPMorgan on Thursday, followed by Wells Fargo on Friday, which leaves the door open a bit for a possible trip(s) to the market this week. The remaining four “big six” earnings reports are sprinkled throughout the following week.

Here's something to think about as we get further into October. All the "big six" have been known to tap the US public debt market in October at one time or another, Morgan Stanley being the most frequent (four of the last five years) and the most prolific ($21.8bln), followed by Goldman, Bank of America and Citigroup (three of the last five). So, while maybe not this week, we should see a pickup in issuance later in the month.

As for market conditions this morning, futures are indicating a much weaker open for the three major averages now that it is quite clear that given the state of the economy, the Fed will most likely pare back its rate cut to a more subdued 25bp at its next policy meeting. That sent Treasury yields even higher, adding to the selloff in pre-market trading. The Dow appears headed for a nearly 200 point lower open, while the S&P500 (-0.52%) and the Nasdaq (-0.71%) are also looking at losses at the open.

The combination of a better-than-expected September jobs report and lower expectations when it comes to rate cuts – not to mention mounting tensions in the Middle Easy, sent Treasury yields even higher over the weekend. The benchmark 10yr yield bumped up two more basis points to 4.00%, a level not seen since the end of July, while the 2yr note yield jumped 7bp to 4.00% for the first time in six weeks, though the long bond (4.26%) was unchanged from Friday’s close.

While there were no ex-SSA offerings announced overnight, we have been told that there are at least four high grade borrowers assessing the market this morning, though that number could grow if those unhampered by earnings blackouts decide to tap the primary market before rates go any higher.

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2024 HIGH GRADE ISSUANCE - 10/07 WEEK, OCTOBER & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - RECENT MANDATES

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