Heavy IG bond supply expected to continue; demand for two-, three-year notes climbs

By Cristal Cody

Tupelo, Miss., Nov. 10 – Investor demand on the short end of the curve in the high-grade bond primary market skyrocketed this week as volatility remained ever present in Treasuries.

New deal volume totaling $44 billion came through over the first four sessions with several issuers choosing short tenors.

PepsiCo Inc.’s $2.5 billion of senior notes (A1/A+) priced Wednesday saw a final order book total of $7.6 billion for all three tranches, but the one-year floating-rate note had the strongest demand and was the largest-sized tranche, a source said.

The floating-rate notes had a final order book of $3.65 billion, while the two-year tranche saw book orders of $1.65 billion and the three-year notes finished with $2.3 billion of book orders, the source said.

The $1 billion of floating-rate notes due Nov. 12, 2024 priced at par to yield SOFR plus 40 basis points, 20 bps better than talk.

In the high-grade Canadian dollar primary market, Suncor Energy Inc. saw strong demand for its two-year medium-term notes (Baa1/BBB/BBB+) that priced on Thursday along with a three-year tranche.

The C$1 billion of 5.6% notes due 2025 was upsized from a C$700 million minimum offering.

The C$500 million offering of 5.4% notes due 2026 was not upsized.

With corporate high-grade bonds priced off Treasuries, the volatility in the market is impacting corporate prices, a syndicate source said.

“There’s been amazing volatility in Treasuries, so the long end has been dramatically impacted,” the source said. “The long bond was yielding 5.11% on Oct. 19, and it is currently in real time yielding 4.737%. So in a span of three weeks and one day, the long bond has richened 37.3 basis points. That is a ridiculous move – that’s almost 5½ points in dollars. That’s why you see a little more stability in the short end in that same time span.”

The two-year note has richened by 9 bps over the past two and half weeks, the source noted.

SSA activity

Demand for short tenors also was strong in the sovereign, supranational and agencies market this week, which saw around $15 billion of new issuance.

Kommuninvest I Sverige AB priced $1.25 billion of 5.25% notes due April 16, 2025 (Aaa/AAA) on Wednesday at SOFR mid-swaps plus 28 bps.

“With this transaction Kommuninvest looked to take advantage of the considerable depth of demand in the front end of the USD market,” Kommuninvest said in a press release.

The final order book was over $3.9 billion and marked “the largest ever order book received by Kommuninvest in the USD market,” according to the release.

After the issuer announced the transaction on Tuesday with initial price talk at SOFR mid-swaps plus 32 bps, overnight indications of interest were more than $1.8 billion by the market open on Wednesday.

Guidance was tightened 2 bps to the SOFR mid-swaps plus 30 bps area.

“Despite the tightening, the growth of the book accelerated rapidly and given the limited size aspirations a decision was made to revise guidance tighter by a further 2 bps at 9 a.m. London with order books in excess of $2.9 [billion],” the agency said.

The deal was the Orebro, Sweden-based issuer’s fourth dollar issue so far this year. Kommuninvest said it now has $14.25 billion outstanding in its U.S. dollar benchmark program.

Heavy deal supply

Looking to the week ahead, the primary market is expected to print enough bonds to hit the $30 billion to $40 billion range as issuers try to price ahead of the year-end holidays, sources said.

The market on Friday was still digesting Federal Reserve chairman Jerome Powell’s comments from Thursday that signaled the possibility of more rate hikes if needed.

“Early signs from the U.S. and Europe show that markets are taking this news with pouted mouths,” Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said in a note. “Treasury yields have also increased slightly and that’s another way to burst equity market bubbles as the risk-reward profile for investing in riskier assets becomes less palatable.”

Market tone was positive on Friday with equities higher and Treasury yields lower by 2 bps to 4 bps on the long end by the close. The two-year Treasury note yield rose 5 bps to 5.07%.

In the secondary market, PepsiCo’s notes traded about 2 bps to 3 bps tighter than issuance, a source said.

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