[MORNING CALL:] So, Now What?

Three ex-SSA borrowers tapped the US public debt market yesterday to bring the month of September to a close. Campbell Soup ($1.15bln), Darden Restaurants ($750m) and Union Electric ($450m) combined to add $2.35bln to the month’s total, which amounted to $172.55bln, making it the tenth busiest ex-SSA issuance month on record, while breaking the all-time September ex-SSA issuance record of $167.52bln set back in 2020.

Coming into the month, the Street was under the impression that September would produce, on average, no more than $137bln in ex-SSA issuance, with the estimates ranging from a low of $125bln, to a high of $146bln. Not only did last month break the all-time September ex-SSA issuance record, but it also made September 2024 the third busiest month of the year, and contributed to the most prolific ex-SSA issuance third quarter on record – 486 deals/$405.049bln.

It also brought ex-SSA issuance for the year to $1.288.508bln, which equates to a 27.9% 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%.

Yesterday’s Darden deal brought the number of M&A-related new issues priced this year to 38 – there were 32 such transactions in 2023. It also brought 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. The company is using a portion of the proceeds from today’s deal to help fund it $605m acquisition of Tex-Mex chain Chuy’s.

Issuance in September was pretty evenly split between industrial/corporates (45%) and FIGs (48%), while utility issuance made up the remaining 7%, including both Yankee and domestic issuance. SSA issuance added $45.985bln, bringing overall (SSA-inclusive) issuance for the month to $218.535bln, making this month only the fourth time ever that September overall issuance has surpassed the $200bln mark. It also brought overall issuance for the year to $1.628.793bln, or 27.6% ahead of last year at this time.

So, what does the Street have in mind for issuance this October? Given the state of the market – there are a couple of events – the presidential election and the next FOMC meeting in November - looming that could have an impact not only on the general market, but the issuance market as well. So, one could say the Street is cautiously optimistic at best.

Over the past decade, the month of October has ranked as the ninth busiest ex-SSA issuance month of the year and has seen an average of $94.9bln in ex-SSA issuance cross the tape. We have seen as much as $122.29bln (2021) and as little as $74.41bln (2019) in ex-SSA issuance come to market in October. The five-year October average is $88.7bln, with only one of the last five October’s breaking the century mark barrier.

As for overall issuance, the 10-year October issuance average is $121.87bln, the sixth busiest issuance month of the year. As much as $157.737bln (2021), and as little as $97.6bln (2022) has priced during the month of October. On average, $112.9bln in overall issuance has priced in October over the last five years. Overall issuance in October has surpassed the $100bln mark in nine of the last 10 years.

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. The guesses for the month of October ranged from a bearish $75bln, to a bullish $115bln. The bearish respondents are evidently taking into consideration that earnings blackouts will have a negative impact on issuance this month. While the brunt of earnings season doesn’t start for another two weeks – the “big six” banks begin reporting on Friday the 11th – issuance could be slow to kick off the month.

As for this week, according to the results of our impromptu weekly issuance poll, on average, the Street is looking for $22bln in new ex-SSA supply this week, with the guesses ranging from a low of $20bln, to a high of $30bln. While there were no new ex-SSA deals announced overnight – there were four SSA offerings placed on the calendar, two for today (IADB’s $500m 5yr “sustainability” floater tap and Africa Finance Corp’s $500m 5yr notes) and two for tomorrow (CPPIB’s 3yr note offering and Municipality Finance’s $1bln 5yr “green” note issue) - we’re told to expect at least six more prospective issuers to step forward to try and jump start the month. Three of those from Ferguson Enterprises who is in the market with a proposed 10yr offering, Alaska Airlines who will be looking to sell 5 and 7yr notes, and Accenture Capital's 4-pt offering of 3s, 5s, 7s and 10s.

As for general market conditions this morning, the markets appear to be trying to wrap their heads around conflicting signals from members of the Fed on the path of interest rates. While it’s a foregone conclusion that the Fed will continue to cut interest rates, the question still remains by how much.

Atlanta Fed President Raphael Bostic, who voted for a 50bp cut at the last meeting, said he is open to another 50bp interest rate cut at the FOMC meeting in November if upcoming data show job growth slowing faster than expected, while Fed Chairman Jerome Powell said that the recent 50bp cut shouldn’t be interpreted as a sign that future moves will be as aggressive.

Muddying the waters further is the walkout by more than 50k longshoremen that has all but closed down ports from New England to Texas, which will certainly have an adverse impact on an already fragile economy, as it wreaks have with the global supply chain. It is estimated that the strike could cost the economy $4bln a day.

Just how this will affect the Fed’s decision on interest rates depends on how long this strike lasts. “If this strike goes on for a couple of days the implications will be rather short-lived. But Air if this drags on, it will have a cascading impact throughout, not just the US economy, but the global economy as well,” said one economist.

That has traders in the Fed Funds futures market rethinking the odds of a 50bp rate cut in November, which has now declined to 39.8%. But some still believe the market is pricing in too many cuts. Among them BlackRock’s Larry Fink, who told Bloomberg News that the market is pricing too many interest-rate cuts given the US economy continues to grow. “The amount of easing that’s in the forward curve is crazy. I do believe there’s room for easing more, but not as much as the forward curve would indicate as most government policies at the moment are more inflationary than deflationary,” Fink said.

To that end, futures are indicating a weaker open for the three major averages this morning, while Treasury yields have fallen as the market braces for the worst outcome of the strike. The benchmark 10yr note, which closed at 3.81% last night, saw its yield fall 6bp overnight to 3.75%, while the long bond yield fell the same amount to 4.08%. The 2yr note yield edged 3bp lower to 3.63%. Corporate spreads were unchanged to where the average high grade bond is trading 92bp over comparable Treasuries.

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2024 HIGH GRADE ISSUANCE - 09/23 WEEK, SEPTEMBER & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - 09/30 WEEK, OCTOBER & 2024 ESTIMATES

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2024 HIGH GRADE ISSUANCE - RECENT MANDATES

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2024 HIGH GRADE ISSUANCE - 10/01 CALENDAR

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