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[THE ENDGAME] : The More Things Change...

THE ENDGAME: The More Things Change 03/20/24

As expected, high grade corporate borrowers went on a one-day sabbatical the third zero issuance day of the year - as they waited to see what the Fed has in store with regards to its monetary policy going forward. That left high grade issuance for the week at $25.15bln, just shy of the average weekly estimate of $27.5bln, a figure we expect will be surpassed tomorrow when issuance resumes.

While the Fed left interest rates unchanged, as widely as expected, it was Fed Chair Powell s comments following the meeting that the markets were anxiously waiting for. It appeared that Powell took on a bit more hawkish tone than the market was hoping for as he stressed the need to proceed with caution when it comes to cutting interest rates, but maintaining the allusion that three rate cuts are coming before the end of the year as the economy continues to expand at a solid pace, though the risks between employment and inflation goals are moving into better balance.

Prior to Powell s press conference, the markets reacted positively with the Dow rallying 140 points, while the S&P500 and the Nasdaq traded 0.15% and 0.34% higher. The Treasury market also traded higher immediately following the announcement. The benchmark 10yr note traded 4bp lower to 4.25%, while the long bond and the 2yr note yields also fell by 4bp to 4.39% and 4.62%, respectively.

And things only got better after Powell s press conference, at least in the equity market. Powell said while inflation has eased substantially it still remains too high. However, he also said the Fed is strongly committed to returning inflation to its 2% target, tempering his earlier remarks, though it appeared to have little impact on the market. Then again, he added that an unexpected weakening in the labor market could also warrant a policy response.

The markets had feared that recent hotter-than-expected inflationary reports (CPI and PPI) would prompt the Fed to consider fewer cuts than the markets anticipated or were hoping for. But the committee put those fears to rest, sending the stock market even higher, with all three major indices closing at record highs. The Dow closed up 401 points to 39,512, while the S&P500 rose 0.89% to close above 5,225 for the very first time, while the Nasdaq was up 1.25% on the day, closing at 16,369. The Dow was led higher by financial stocks on the hope that rate cuts this year will keep the economy growing, while the Nasdaq rally was powered by those high growth tech stocks who stand to benefit the most from lower for longer interest rates.

However, the Treasury market was a little less relieved, at least at the long end of the curve where the benchmark 10yr closed only 3bp lower on the day at 4.27%, while the long bond actually closed 1bp higher at 4.45%. On the other hand, the 2yr note, the most susceptible to the vagaries of underlying interest rates and the market s best guess as to where the Fed Funds rate over the next 24 months will settle, rallied 9bp to close at 4.59%.

The broader markets reaction to the Fed's action, or inaction, if you will, should bode well for corporate issuance which, as we all know, has been on a tear this year. Ex-SSA high grade issuance has already topped the $500bln mark ($509.654bln) and we have not even reached the end of the first quarter. Needless to say, running at a 38.5% faster clip than last year, the first quarter of 2024 is already the most prolific issuance first quarter on record, and the second busiest issuance quarter ever, behind the $715.491bln that came to market during the second quarter of 2020 during the height of the COVID pandemic when issuers were scrambling to raise capital to shore up their balance sheets.

With interest rates still relatively low, corporate spreads (+92bp) near their tightest level (+86bp) in the last 10 years, and investors seemingly unable to put corporate paper in their portfolios, it should be no problem for ex-SSA high grade issuance to reach, if not surpass, the average monthly estimate of $135bln with six viable trading days remaining. There's even a possibility of reaching the highest monthly estimate of $150bln - March as averaged $153.383bln over the last decade.

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