Morning Commentary: High-grade primary quiet, mostly shut for year; flows turn positive

By Cristal Cody

Tupelo, Miss., Dec. 7 – Little primary action is expected for the remainder of the year with the week ending with only one session of high-grade supply.

Stocks softened and Treasuries were mixed over the morning following the Labor Department’s release of a weaker-than-expected November jobs report. The Labor Department announced on Friday that 155,000 jobs were added during the month, below market forecasts of a 198,000 increase. The unemployment rate was unchanged at 3.7%.

Investment-grade issuers have stayed out of the primary market since pricing more than $4 billion of bonds on Monday. The financial markets were closed on Wednesday for the funeral of former U.S. president George H.W. Bush.

About $15 billion to $20 billion of investment-grade issuance was expected for the week – before the national day of mourning was observed on Wednesday, during which U.S. markets were closed. About $25 billion to $30 billion of total supply was initially predicted for December, according to syndicate sources.

However, some syndicate sources are reporting a pullback for the rest of December with some deals being pushed to next year’s calendar.

In the week ahead, zero to about $5 billion of investment-grade deal volume is forecast, according to market sources.

While issuance has been light, secondary trading in the high-grade bond market strengthened over the week. On Thursday, $24.19 billion of investment-grade bonds traded, compared to $21.96 billion on Tuesday and $20.94 billion on Monday, according to Trace.

High-grade flows improve

Meanwhile, outflows from U.S. bond funds and ETFs moderated to $430 million for the week ended Wednesday from a $1.74 billion outflow in the prior week, Yuri Seliger, an analyst with BofA Merrill Lynch, said in a note released on Friday.

“Outflows were lower for high yield and loans, while flows turned positive for high grade,” he said. “That more than offset higher outflows from munis and lower inflows to government bonds.”

An inflow of $320 million in the high-grade space, which includes corporates, Treasuries, agencies and mortgages, followed a $1.22 billion outflow a week ago.

The move was the result of a big drop in outflows excluding short-term to $170 million from $2.37 billion, while inflows to short-term high grade also were lower at $490 million from $1.16 billion, according to the report.

“This suggests less outright redemptions and a slowdown in rotation out of duration and into the more defensive short-term high grade,” Seliger said.

High-grade ETFs, which tend to be more dominated by institutional investors, also saw flows improve to a $460 million inflow from a $260 million outflow, he said.

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