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CORRECTED-US high-grade market braces for more supply after record July
(Removes erroneous reference to convexity in 16th paragraph)
NEW YORK, July 31 (IFR) - A record USD75.773bn of new issuance was placed by investment-grade borrowers in July, and if the building pipeline for August is any indication, it appears syndicate bankers will be lucky to enjoy any lazy days of summer this season.
Volume for the month surpasses the previous July record of USD71.875bn set last year, according to IFR Markets data, which includes investment-grade emerging market issuance.
It stands in stark contrast to the average USD37.38bn of issuance recorded for the month of July in the years spanning 2004 to 2011.
"It certainly took us by surprise," said one syndicate manager. "We were initially expecting something like USD40bn or USD45bn at the beginning of the month."
The pace is showing no signs of slowing with a flurry of issuers expected to tap the market on Thursday to take advantage of a 10 basis point drop in the 10-year Treasury yield to 2.58%.
That was prompted by the FOMC's post monthly meeting statement in which policymakers said they expected to maintain their highly accommodative stance.
"We'll see some deals probably tomorrow, and we expect it to stay pretty busy right up until the last week of August," said the manager.
A survey of 10 syndicate desks found August estimates ranged from US$45bn to US$62bn, most of which will be squeezed into the first few weeks of the month.
Issuers are also looking to get ahead of any potentially gloomy July employment news, when the government releases its non-farm payrolls number on Friday.
"If the number is much bigger than expected, then you could see the 10-year (Treasury) push to a new range and reset at 3.00%, " said one banker.
BOUNCING BACK
July's extraordinary comeback from June's meltdown was driven by a staggering USD45.5bn of issues by names in the Financial Institutions Group (FIG), accounting for about 60% of total issuance. FIG issuers followed the advice they gave to their borrowing clients and pounced on investor demand as rates traded in a 2.5%-2.75% range.
Short-dated fixed and floating-rate bonds dominated, as would be expected in a rising rate environment, when investors tend to favor short-duration product.
A full 54 of the 95 tranches brought this month had tenors of five years or less. Three-year paper was the most prevalent, with 26 tranches worth US$21.725bn, followed by 22 tranches of five-year paper amounting to US$17bn.
Corporate issuers have demonstrated their awareness of investors' floating-rate mandates, with FRN issuance accounting for about 32% of the total supply in July - the highest percentage tally for FRNs in the year so far.
The big surprise was the proliferation of 30-year offerings - 12 tranches in July - which were among the best performing deals in the after-market.
Demand for 30-year paper is usually muted in a rising interest rate environment, but an avalanche of money from insurance companies, pension funds and other players at the long end poured into the market to pick up higher yielding bonds following the June selloff.
"The order sizes from insurance companies and pension funds materially increased," said one source. "Before the June selloff, I'd say these kinds of names would make up say 25% of a book, and now it's closer to 35-40%."
That 30-year demand was supplemented by a strong overnight bid out of Korea, Japan and Hong Kong, as insurance companies in Asia increasingly sought out long-dated dollar paper.
Demand will continue for 30-year bonds, and bankers are hearing more issuers in the wings with plans to lock in long-dated funding at still historically low levels, while players at the long end are still starved of supply.
The strong aftermarket performance has further bolstered demand.
Healthcare company Wellpoint's US$600m 2044s, issued at 145bp on Tuesday, were 4bp tighter today. Supermarket chain Kroger's US$400m 2043s priced at 155bp on July 18, were 7bp tighter and oilfield services company Halliburton's US$900m 2043s priced at 110bp were trading 5bp tighter. (Reporting by Danielle Robinson; Additional reporting by John Balassi and Anthony Rodriguez; Editing by Ciara Linnane)
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