Investment-grade deals thin on volatility; volume misses estimates; outflows slow

By Cristal Cody

Tupelo, Miss., Oct. 6 – Several investment-grade bond issuers chose to stay on the sidelines this week as Treasury yields climbed to their highest since the 2007 financial crisis with supply likely to stay light in the short week ahead.

Deal volume for the week came up short of initial market forecasts, sources said.

Less than $9 billion of high-grade corporate notes were brought to the primary market this week, while about $15 billion of volume was expected.

October is forecast to post only about $80 billion of new high-grade issuance with next week a short week due to the Columbus Day holiday, sources note.

Treasury yields climbed again on Friday following the mixed September jobs report. The benchmark 10-year note yield rose 6 basis points to 4.78%. The 30-year bond yield finished up 5 bps at 4.94%.

The Labor Department reported on Friday that September non-farm payroll employment jumped by a seasonally adjusted 336,000 jobs, much higher than the 170,000 increase market analysts expected.

The unemployment rate was flat at 3.8%, lower than a 3.7% rate forecast.

“The surprisingly strong September payroll report adds momentum to the trends in place since the September FOMC meeting – namely the higher-for-longer mantra and a bear steepening of the UST curve,” according to the research desk at BNP Securities on Friday. “While 10y and 30y UST yields reacted by making new cycle highs and have jumped as much as 50-60 bp since the 20 September FOMC meeting, the short end has remained relatively stable. This leaves markets still pricing less than a 50% probability of a 25 bp hike in November and just over a 50% probability of a hike through December.”

The climb in Treasury yields likely will keep some investment-grade bond issuers at bay, sources said.

“The sell-off in global yields continued during the past week, taking 30-year Treasury yields to 5%, up more than 100 bps since the end of June,” Mark Dowding, BlueBay chief investment officer at RBC Global Asset Management, said in a note released Friday to Prospect News.

“The extent of this re-pricing is being felt by other long duration assets, with stocks and credit under pressure. In part, risk assets need to deal with materially higher discount rates for future cashflows.”

The ICE BofA US IG index spread was 3 bps wider by Thursday after softening 2 points in Tuesday’s market sell-off.

The index spread widened 1 bp in September, BofA reported.

High-grade spreads “should remain resilient as long as the problem is higher rates,” BofA analysts said. “The big jump in interest rate volatility has clearly been negative for spreads more recently. However, lower stocks and more attractive yields should eventually slow down the sell-off. Hence, we expect IG spreads to trade in a relatively tight range in October.”

ETFs post inflows

Outflows from U.S. high-grade bond funds and ETFs slowed significantly to $130 million over the past week ended Wednesday, according to a BofA Securities note.

Funds and ETFs registered a record $3.7 billion outflow in the prior week.

Investment-grade ETFs had inflows of $100 million this week after a $2.31 billion outflow a week earlier, BofA said.

Outflows moderated for high-grade funds to $230 million following a $1.39 billion outflow last week.

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