[THE ENDGAME] : Settling for Silver

Unlike the USA women’s gymnastics team, the $125.504bln in ex-SSA high grade issuance priced this month, while impressive, had to settle for the “silver medal” when it came to July issuance. With the addition of, what was the last of the activity in the July primary market, six issuers, who apparently had enough left in the tank, combined to raise $8.7bln yesterday, the last hurrah for the month, today being the thirteenth “zero” issuance day of the year.

That brought issuance for the month to $125.504bln, earning it a “silver medal” when it comes to July issuance, 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 earned a “silver medal”, finishing behind July 2015’s record $162.85bln, and topping the decade-long July average of $110.298bln

This month’s haul brought the year-to-date ex-SSA new issue volume to $1.008.963bln, 25% ahead of last year at this time, while overall (SSA-inclusive) issuance ($1.275.113bln) is up 23.4% 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 $92.035per month over the last five months of the year, while overall (SSA-inclusive) issuance has averaged $111.083bln per month.

Even if you score it like they used to do in the Olympics back in the day, and throw out the high and the low, the German judge – who were always the strictest – would give ex-SSA issuance a $90.695bln score, while overall issuance would score $110.21bln. Either way, those scores would be enough for both ex-SSA and overall issuance to top, not only the average annual estimates, but the highest ($1.350.000bln/ex-SSA and $1.550.000bln/overall) estimates as well, landing both as the second most prolific high grade issuance years behind only 2020’s pandemic-induced $1.795.825bln and $2.191.789bln, respectively.

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, 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 today – Dow (+100 points), S&P500 (+1.58%) and Nasdaq (+2.64%) - 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 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 1%, respectively.

But it might have been comments by DoubleLine’s Jeffrey Gundlach that sent Treasury yields even lower. Gundlach, who thought the Fed should have cut rates today, believes the Fed will wait too long to cut rates, but is expecting cuts totaling 150bp in the next year. Whether or not that was the reason, Treasury yields fell even further to where the benchmark 10yr note yield closed at 4.09%, better by 6bp on the day. Meanwhile, the long bond, which Gundlack believes is in the “throes of angst,” closed 5bp lower at 4.35%, unchanged from before Powell’s remarks. As for the 2yr note, the most susceptible to the vagaries of underlying interest rates saw its yield close at 4.29%, 6vp lower on the day.

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