[MORNING CALL:] Will It Be An August August?

We’ll soon find out later today since we have held off conducting our weekly/monthly issuance polls until after the FOMC meeting yesterday, though we’re fairly confident that any potential borrowers who put their financing plans on hold until after they heard what Fed Chair Powell had to say, and how the markets reacted to him, are unlikely to make an appearance today. However, after the thirteenth ex-SSA “zero” issuance day of the year, we’re told there may be two or three would-be borrowers assessing market conditions this morning to kick off the month, a month that, with the exception of December, is historically the slowest high grade issuance month of the year.

Over the last decade, high grade issuance in the month of August has averaged a rather anemic $87.85bln, though we have seen as much as $140bln (2020), but also as little as $42bln (2014) price during the “dog days of summer.” Last August, 44 borrowers raised $68.1bln, far below the 10yr average.

Until we get a better handle on what to expect next week and next month, as expected, issuance this week was frontloaded and limited to just two days. Sixteen issuers raised $22.3bln, enough to top the lowest weekly estimate of $20bln, but, so far, falling short of the average weekly estimate ($27bln) for only the eighth time this year – barring any late entries today, or possibly tomorrow. Still, that brought issuance for last month to $125.504bln, topping July 2017’s $120.33bln, but finishing behind July 2015’s $128.48bln. Still, it blew away all monthly estimates including the highest one of $95bln and topped the 10yr average ($88.5bln) by leaps and bounds. With the addition of $23.8bln in SSA issuance, overall (SSA-inclusive) issuance ($149.304bln) also topped the decade-long July average of $110.298bln, and second only to July 2015’s record $162.85bln.

Last month’s haul brought the year-to-date ex-SSA new issue volume to $1.008.963bln, 23.1% ahead of last year at this time, while overall (SSA-inclusive) issuance ($1.275.113bln) is up 22% over last year. Just to refresh your memory, coming into this year, the Street, on average, was expecting $1.275.000bln in ex-SSA issuance and $1.420.000bln in overall issuance. That means we’ll need to see an average of $53bln in ex-SSA debt to price each month over the next five to reach that pinnacle, while overall (SSA-inclusive) issuance will need to average only $28.8bln to reach the average estimate. Over the past five years, ex-SSA issuance has averaged $92.035 per month over the last five months of the year, while overall (SSA-inclusive) issuance has averaged $111.083bln per month.

Now, there are some who believe issuance will begin to taper as the summer drags on and the closer, we get to the presidential election in November. So, I guess that could throw a monkey wrench into this way of thinking. However, that could also be good news in the near term for investors, since many potential borrowers are likely to accelerate their financing plans while they have a receptive audience and relatively tight spreads, ahead of the expected volatility that goes along with the run up to the election itself.

Despite the hurdles associated with earnings blackouts, domestic issuance (79%) dominated last month’s field, with FIG (47%) issuance crossing the tape first by a wide margin, ala Katie Ledecky, thanks to appearances from five of the “big six” banks, some of whom even double-dipped, accounting for 52.1% of the month’s FIG issuance. JPMorgan ($9bln) led the charge, matching its $9bln offering of last April as the largest FIG deal of the year, while Morgan Stanley, via two trips to the US public debt market last month, also raised $9bln. Citigroup, in one form or another, also came to market twice in July, raising a total of $5.5bln. Meanwhile, Goldman Sachs ($5.5bln) and Wells Fargo ($2bln) rounded out issuance from the “big six”. Bank of America was the only member of the elite group who chose not to tap the market post-earnings results.

July also played host to two M&A-related transactions - Occidental Petroleum’s $5bln 5-pt offering to help fund its $12bln acquisition of CrownRock and BlackRock Funding’s $2.5bln 3pt deal to help fund the company’s $3.2bln acquisition of Preqin. That brought the number of M&A-related transactions for the year to 23, which have raised $101.75bln, or 10.08% of this year’s ex-SSA total issuance, with scores of deals still on the table. Last year there were 32 M&A-related transactions that raised $128.4bln, or 10.62% of the year’s final tally. Last year there were 14 M&A-related transactions priced during the second half of the year, raising $40.2bln in the process. While some have argued that the upcoming election could put many M&A deals on hold, in 2020, the last time we elected a president, 25 M&A-related deals were priced between July and December, totaling $82bln.

July also included the fourth largest offering of any kind this year – UnitedHealth Group’s $12bln 8-pt deal – surpassed only by Abbvie ($15bln), Cisco Systems ($13.5bln) and Bristol-Myers Squibb ($13bln).

Over the course of the month the broader markets were quite volatile although both the equity and debt markets rallied from the previous month. Thanks to, and in despite of, a major rally yesterday – Dow (+100 points), S&P500 (+1.58%) and Nasdaq (+2.64%), Meta’s earnings might have has something to do with that - two of the three major averages ended the month higher. The Dow gained 4.2%, while the S&P500 eked out a 1.4% gain. However, the Nasdaq, victimized by the question of whether the future monetization of AI will justify the cost, closed out the month 0.8% lower.

The benchmark 10yr Treasury note, which ended June yielding 4.36%, traded as high as 4.48%, before closing out the month 27bp lower at 4.09%, its lowest level since March, while the long bond (4.35%) 16bp lower and the 2yr note saw its yield fall 42bp to 4.29%. The same can be said for corporate spreads which closed out June at +96bp, tightening to +92bp during the month, only to close with the average high grade bond trading 96bp over comparable Treasuries, unchanged on the month.

All this, before and after, Fed Chair Powell gave a veiled indication that the central bank will most likely, as many had expected or hoped for, cut rates at the next FOMC meeting in September. However, the chairman stuck to his guns when he suggested that there was no guarantee, as the decision will be dependent on economic data between now and then, though it seemed to have little effect on the markets. Prior to his comments, traders in the Fed Funds futures market had priced in a 100% chance for a 25bp rate cut in September, and a 12% chance of the cut being 50bp. After Powell’s press conference, those odds changed to 100% and 64.3%, respectively.

As for market conditions this morning should any high grade borrowers decide to tap the market, futures are indicating a continuation of yesterday’s rally, with the Dow and the S&P500 both looking at marginal gains at the open, while the Nasdaq could conceivably open with a triple-digit advance. Encouraged by Powell’s comments, along with the Bank of England’s first rate cut in four years, Treasuries are once again in rally mode. The benchmark 10yr note is trading 4bp better this morning at 4.05%. its lowest level since early February, while the long bond saw its yield fall another 3bp overnight to 4.32%.

Meanwhile, the 2yr note, the most susceptible to the vagaries of underlying interest rates, was unchanged overnight at 4.29%. Corporate spread widened for the second straight session to where the average high grade bond is trading 97bp over comparable Treasuries, its widest level since mid-March.

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2024 HIGH GRADE ISSUANCE - 2024 VS 2023 COMPARISON

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2024 HIGH GRADE ISSUANCE - 07/29 WEEK, JULY & 2024 ESTIMATES

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