By Shankar Ramakrishnan
NEW YORK, Dec 16 (IFR) - Bondholders are taking in their stride renewed noise about the US Federal Reserve tapering its bond purchases and ensuring a solid issuance momentum in the US primary bond markets that is expected to carry into 2014.
The first two weeks of December have seen manic debt issuance activity in the US, with more than US$53bn raised by US high-grade and high-yield companies.
The gush of supply so late in the year took some in the market by surprise as it comes after a year in which over US$1trn of bonds have been issued. It also reflects a perhaps surprising nonchalance among investors about worries that yields will spike and cause near-term portfolio losses if and when the Fed starts tapering its quantitative easing programme.
“You would have thought that there would be some let-up in the investment interest given it has been a busy year of issuance and we are at the tail-end of this year, but there is nothing like that at this point,” said one DCM syndicate banker.
The bid for bonds is tenacious - and perhaps indiscriminate - something reflected in oversized order books and negative new-issue concessions for transactions across the whole rating spectrum.
Some vivid examples of such investor frenzy can be found in the responses to deals done in the past two weeks. Triple A rated Johnson & Johnson raised US$3.5bn on December 2 from a six-part transaction that tightened a few basis points through the bookbuilding process - and still ended up with a US$8.5bn order book. A three-year fixed-rate tranche was priced with a spread of Treasuries plus 18bp, one of the tightest high-grade spreads this year.
On the same day, CVS Caremark (Baa1/BBB+), raised US$4bn from a four-part trade that tightened pricing substantially from initial price thought levels and ended up with total books of US$19bn.
Microsoft (rated Triple A) garnered a US$9bn order book for a US$3.25bn three-tranche deal that tightened by about 5bp to 10bp from IPT levels, and new-issue concessions were judged to be about flat to 5bp across the tranches.
Debt raised to fund M&A received specific attention. Thermo Fisher Scientific’s US$3.2bn four-part issue tightened pricing across the tranches by about 20bp to 25bp from IPT levels and still managed to attract a peak order book of about US$25bn. This dropped at final pricing to end at an impressive US$21.5bn.
An acquisition financing bond for healthcare company Endo Health Solutions (B1/B) almost doubled the size of the eight-year non-call three senior note deal to US$700m from US$375m, and still managed to price it at 5.75% versus 5.875% area price talk.
Despite all the tightness in pricing levels at the primary stage, almost every deal priced in the last two weeks then tightened from their new issue levels.
Demand for bonds may have been helped by a perception that the impact of a tapering is somehow priced in.
“There is greater belief now that taper is priced into the curve,” said Marc Fratepietro, co-head of investment-grade debt coverage at Deutsche Bank. “The Fed has done a good job so far in separating the issues of tightening and tapering of its bond-purchase programme It does seem like the Fed will continue its accommodative monetary policy stance but tapering would not lead to tightening, so short rates will be kept low.”
Edward Marrinan, co-head of credit strategy at RBS, agreed with that analysis. “The Treasury market appears to have already priced in a tapering. The underlying fundamentals of corporates are still supportive and credit as such looks attractive in yield and return potential compared with Treasuries,” he said.
Most market participants expect this momentum to continue into the first few weeks of 2014, suggesting next year will be as busy if not busier than 2013, despite event risks such as tapering, the US debt ceiling discussions and geo-political risks.
“The strong bid for credit should continue into 2014 because the real economy is doing well, corporate earnings have been solid and ratings migration has been stable to positive, with data showing more corporate upgrades than downgrades. On top of that, there continue to be healthy flows into credit, particularly from pension funds,” said Fratepietro.
A recent S&P report said the number of entities poised for upgrades increased to 324 as of November 29 from 249 a month earlier. This is the highest level since February 2008.