February 26, 2016 / 3:08 PM / 2 years ago

US high-grade tallies massive week

NEW YORK, Feb 26 (IFR) - Corporate bond issuers turned on the taps this week to generate the US primary market’s second-largest week of the year, selling more than US$44bn of debt as buyers welcomed the chance to put money to work at attractive spreads.

Top names such as Johnson & Johnson, Cisco Systems and UnitedHealth Group found demand across the curve, as sentiment in the US high-grade market continues to improve, and Wells Fargo was due to push the weekly tally even higher on Friday with a new five-year holdco trade.

Year-to-date supply was more than US$211bn as of Thursday’s close, or about US$17bn higher than in the same period last year.

Another US$30bn-$40bn in new supply is expected to hit the market next week, including some long-anticipated M&A financing deals.

While volatility shuttered the market earlier this month, it also helped to push spreads out to levels that investors say are too appealing to ignore.

“It’s no rally back to the levels of 18 months ago, but credit does look attractive here,” said Neil Sutherland, a portfolio manager at Schroders. “We’ve been buffeted by headlines like China, oil and the Fed, and while that hasn’t gone away, investment-grade has taken more pain than other markets.”

Average high-grade bond spreads gapped out to 221bp on February 11 at the height of the recent sell-off, but by Thursday’s close had tightened to 214bp, according to Bank of America Merrill Lynch data.

The improving conditions have led to a staggering US$78bn in new bonds over the past two weeks, including deals from household names Apple, IBM and Goldman Sachs.

While the Federal Reserve’s decision not to hike rates in January unnerved some investors, stronger economic data and the recent rally in equities and commodities have soothed concerns.

“People were thinking about whether the volatility represented a global recession  but the stabilisation in stocks and oil prices helped assuage fears,” said Jeffrey MacDonald, director of fixed income strategies at Fiduciary Trust. “Recent economic data does not signal an imminent US recession.”

PRIMARY MARKET

Poor liquidity in secondary markets has also helped to drive demand for new issues, one syndicate banker told IFR.

“The only way to add a sizeable position that will move the needle on your portfolio is the primary market,” he said.

Bond syndicates are still offering hefty premiums to attract investors at initial thoughts but have been able to tighten pricing aggressively from there, with more than one deal last week coming flat to the curve.

Paccar Financial priced a US$500m three and five-year senior deal flat at Treasuries plus 78bp and Treasuries plus 103bp, while United Health’s 10-year also came flat at 135bp.

That compared with an average new-issue concession of 6bp across the week’s deals.

Syndicates were able to build large books on most deals, with the Kellogg US$1.4bn two-trancher on Thursday five times covered, and J&J’s US$7.5bn seven-parter seeing a hefty US$27.35bn final book.

Deals also performed well in secondary: J&J’s and JP Morgan’s bonds, which both priced Thursday, were trading 5bp and 7bp tighter respectively Friday. Cisco’s 10-year, which priced at T+120bp on Monday, was 15bp tighter by Friday.

Despite the recent successes, however, syndicate desks say not every issuer is destined for an easy ride.

“These are all high-quality names,” said the syndicate banker of the week’s deals. “They’re all places folks can park some money, get yield, and no one is going to be tapping them on the shoulder tomorrow saying ‘Why did you buy that?'”

And others warn that significant risks remain.

“High-grade corporate credit should be fine, but everything is seeking new levels relative to monetary policy and uncertainty globally,” said Jeff Hudson, partner at Cedar Ridge Partners, an investment firm. “We’re in the early innings of whatever this reset is going to be.” (Reporting by Will Caiger-Smith; Editing by Matthew Davies)

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