[MORNING CALL:] You Can't Keep a Good Man Down

Just when it seemed like high grade issuance had stalled, a visit from one of the “big six” banks and the fourth M&A-related transaction of the week propelled ex-SSA high grade issuance past the average weekly Street estimate for the twenty-eighth week this year yesterday. Coming into this week, a week that was fraught with inflationary data releases, the Street, on average, was looking for $35bln in new supply from ex-SSA borrowers, a 37% decline from the previous week ($80.575bln), which was par for the course.

However, Citigroup’s $4.1bln 2-pt offering of ($3bln) 6nc5 fixed-to-floating rate notes and ($1.1bln) 15nc10 subordinated notes - the bank’s eighth trip to the market this year, bringing the total raised to $26.45bln – and Hewlett-Packard Enterprise’ $9bln 6-pt offering, to help fund its $14bln Juniper Networks acquisition spearheaded a $14.6bln day, bringing ex-SSA issuance for the week to $37.825bln.

Not only was it the fourth M&A-related transaction to come to market this week, but it was also the tenth largest ex-SSA offering of the year (tied with JPMorgan), and the sixth largest M&A transaction of 2024. Earlier this week, Oneok raised $7bln through a 6-pt offering, the tenth largest corporate/industrial offering of the year and the seventh largest M&A deal of the year, to fund the purchase price ($5.9bln) for each of the EnLink and the Medallion Midstream. Additionally, Helmerich & Payne raised $1.25bln via a 3-pt offering to help fund the purchase price ($1.9725bln) for the KCA Deutag acquisition, while Bunge Ltd Finance raised $2bln to fund a portion of the cash consideration for the acquisition and to repay a portion of certain Viterra debt to be assumed in connection with the acquisition.

The HPE deal brought the number of M&A-related transactions priced this year to 34, which have raised $141.035bln, or 11.42% of 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. Fourteen of those deals 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.

More impressively, yesterday’s $14.6bln brought overall (SSA-inclusive) issuance for the year to $1.555.523bln, which is already enough to top the highest annual overall estimate of $1.550.000bln, with a little more than three months remaining in the year. Ex-SSA issuance is now running at a 27.6% quicker pace than this time last year, while overall issuance has surpassed last year by 26.8%, with SSA entities contributing $321.165bln to the overall total.

Investors swarmed all over the HPE deal, why not considering the deal came at or near a 10bp concession, submitting $34.45bln in orders, or 3.83x covered, though three of the six tranches - a 2yr FRN tranche was dropped at launch, the sixteenth such drop of the year – did price 2bp tighter than their launch, while the Citigroup deal book peaked at $15.9bln, or 3.88x covered. Yesterday's deals contracted an average of 28.8bp from IPT/PX; were 3.7x covered; and priced with an average NIC of 6.70bp.

Yesterday’s August PPI read (0.2% vs 0.2% m-o-m, 1.7% vs 1.7% y-o-y) did little to dissuade the equity market from believing the Fed will cut interest rates by 25bp when it meets next week, following the lead of the ECB which did just that, its second cut of the year, despite an uptick in core prices. While it appeared that for all intents and purposes, the Street had all but given up on the notion that we could see a 50bp cut next week, though some, including former Cleveland Fed President Loretta Mester, think it is warranted, an article in the Wall Street Journal seemed to have resurrected the great 25/ 50 debate.

According to the article, Fed policymakers were considering whether to reduce rates by a more typical quarter point or opt for a more aggressive half point. However, some economists argue that worry that a 50bp cut by the Fed would be an overreaction, pointing out that just about every time the Fed has cut interest rates by 50bp, the economy has dipped into a recession, something the Fed would want to avoid at all costs. While there doesn’t appear to have been anything new in the article, it did have a profound effect on the markets. After Treasury yields rose as investors put the risk on trade back on - the benchmark 10yr saw its yield rise 3bp to close at 3.68%, while the long bond yield jumped 4bp to 4.00%, and the 2yr note yield moved 2bp higher, closing at 3.64% - the market rallied overnight, with the 2yr note yield, the most susceptible to the vagaries of underlying interest rates, falling 5bp to 3.59%, while the benchmark 10yr note, saw its yield fall 3bp to 3.65%, back to its lowest level of the year.

The long bond yield also retreated 3bp from it’s 4.005 closing level of last night. Corporate spreads also tightened for the first time this week with the average high-grade bond now trading 99bp over comparable Treasuries. Apparently, the article caused traders in the Fed funds futures market to change their tune. Whereas the odds of a 50bp rate cut next week stood at 27% yesterday, this morning those odds increased to 45%, while the odds of a 25bp cut declined from 73% to 55%.

As for equity market conditions this morning, futures are indicating a rather benign open for the three major indices. This after a day void of the volatility that plagued the markets throughout most of the week, with the Dow up 235 points, while the S&P500 (+0.75%) turned in its fourth consecutive winning session. The Nasdaq, on the back of rising interest rates and a strong showing from Nvidia (3.23%), ended the day up 1.00%.

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

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2024 HIGH GRADE ISSUANCE - RECENT MANDATES

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2024 HIGH GRADE ISSUANCE - 09/12 PRICINGS

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