US high-grade market closes out painful week for issuers

Fri Jun 7, 2013 3:36pm EDT

NEW YORK, June 7 (IFR) - A reasonable May payrolls number failed to wipe out the pain suffered by borrowers and their underwriters this week, which saw the first pulled deal since January, dwindling order book sizes, a blowout of new issue concessions and a change in the kind of credit buyers want.

Secondary bond spreads languished on Friday after the May non-farm payrolls report came right on the nail at 175,000 jobs added. Nerves were further frayed as the 10-year Treasury yield continued to climb on Friday afternoon.

"Who knows what the market will be like?" said one syndicate manager at a major bond house about next week. "You just cannot say 'the payroll number was in line with expectations, great! Let's go!."

The lack of confidence followed the sell-side's misreading of the market last Monday, when issuers like EMC Corp and RBS had to back out spreads at launch. RBS had to pay 30 basis points in new issue concession. Triple B-rated Petrofac pulled its benchmark offering of five and 10-year notes.

The investment-grade market suffered its first outflow of funds this week in six months, a clear response to concerns about rising interest rates as the Fed orchestrates an exit from QE.

Those outflows have dampened the appetite of mutual funds, the sector of the investor universe that has seen the greatest growth in the past few years and now accounts for 30-45% of new issue allocations, according to credit strategists.

"Mutual funds have played a large role in the syndicate process in the past year or so and it may not be the case that we can count on them to do so over the next six months if rates continue to back up," said Jason Shoup, head of investment grade credit strategy at Citigroup.

That means a complete change in the new issue market from what it was like in the first six months of this year.

"It will take some time - if we ever do - to go back to the issuance market of a month or two ago. Not when everyone is so laser-focused on rates and the Fed and the prospect of rates going higher," said Shoup.

Only a few weeks ago, investors were looking for product with some yield and were snapping up bank capital securities and weak Triple-Bs.

Quality issuers rated Single-A and higher trading at tight spreads were less sought-after in the first five months of the year and had to offer some concession to get a strong order book.

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