[MORNING CALL:] Resetting the Table

According to the latest retail sales data, the consumer, and the economy, appears to be alive and well. Retails sales in July increased 1%, much better than what the Street had expected (0.4%). That 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 above where they were before the market meltdown 10 days ago. Adding to the euphoria was a decline (227k vs 235k) in the number of initial jobless claims.

The combination of the two swept fears of a recession off the table, replaced by the prospects of the Fed bringing the economy in for a soft landing, with an interest rate cut next month. One portfolio manager suggested that it should have come as no surprise that the market rebounded after investors overreacted to a few soft data points last week. But was yesterday's rally an overreaction in the opposite direction to a few strong data points? Either way, the question remains, will the rate cut be 25bp or 50bp? Traders in the Fed Funds futures market are now leaning towards the former, putting the odds at 68.5%, up from 49% a week ago. However, some are quick to point out that we still have quite a few data points before the next FOMC meeting. Consider this. What if those data points also come in strong, will we even need a rate cut?

With the risk on trade back in play, the safe haven of the Treasury market paid the price with yields moving higher along with equities. The benchmark 10yr note saw its yield jump 9bp to 3.92%, while the long bond, which closed at 4.12% last night, saw its yield pop 6bp to 4.18%. In the meantime, the 2yr note, the most susceptible to the vagaries of underlying rates, traded 14bp higher to 4.08%. its largest single day rise in two months. That didn’t stop five high grade borrowers from tapping the primary market yesterday, after two straight sessions that saw only two borrowers dip their toes in the water. Quest Diagnostics, to help fund its $985m acquisition of LifeLabs, raised $1.85bln via a 3-pt offering of 3s, 5s and 10s, while Cox Communications, through a 2-pt offering of 10s and 30s, contributed $1.5bln to yesterday’s final tally of $5.4bln.

The remainder of the day’s haul can be attributed to Boston Properties’ upsized $850m 10yr REIT offering, Western Midstream Operating’s $800m 10yr note deal, and Affiliated Managers Group’s upsized $400m 10yr note offering. The Quest Diagnostics deal was the second M&A-related deal of the week - Eli Lilly ($3.2bln), and the twenty-fifth priced this year, bringing the total raised to $105.935bln, or 9.7% of this year's total ex-SSA issuance. Last year there were 32 M&A-related transactions which raised $128.4bln, or 10.62% of the year’s final tally.

Yesterday’s activity brought ex-SSA issuance for the week to $29bln, within a hair of the average weekly estimated of $30bln, making this only the ninth week this year that issuance has not lived up to expectations. However, it 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, within $8.3bln of the lowest yearly estimate of $1.100.000bln.

We’re not expecting much, if anything, in the way of corporate issuance today, it being a typical lazy, hazy summer Friday. However, one or two potential issuers, encouraged by the reception given those deals that did come to market this week, just may surprise the market. On average, the 20 deals that priced this week did so with an average contraction of 29.9bp, while amassing a combined book of more than $135bln, or 4.6x covered, and pricing with an average NIC of 1.59bp.

As for market conditions this morning, futures are indicating a modestly softer open for the three major indices after yesterday’s rally, while the odds now leaning more toward a 25bp rate cut, which many believe is already priced into the market, seems to have ignited a spark in the Treasury market, where yields are reversing yesterday’s course. The benchmark 10yr note, which closed at 3.92% last night, rallied 6bp overnight to where it is now trading at 3.87%, while the long bond staged a rally of its own (-5bp) to 4.13%. Even the short end got in on the act, with the 2yr note now trading 4bp better this morning at 4.04%. In the meantime, corporate spreads tightened dramatically. The average high grade bond is now trading 98bp over comparable Treasuries, a 4bp tightening from yesterday, and the tightest they have been in two weeks.

.

2024 HIGH GRADE ISSUANCE - 2024 VS 2023 COMPARISON

.

.

2024 HIGH GRADE ISSUANCE - 08/12 WEEK, AUGUST & 2024 ESTIMATES

.

.

2024 HIGH GRADE ISSUANCE - RECENT MANDATES

.

.

2024 HIGH GRADE ISSUANCE - 08/15 PRICINGS

.

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

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