High-grade supply disappoints; market looks for more bank paper; corporate inflows eyed

By Cristal Cody

Tupelo, Miss., Jan. 20 – Investment-grade supply is expected to remain mostly light in the final full week of January following slow bond issuance in the Jan. 16 week.

About $16 billion of deals were brought to the primary market over the short holiday week, bulked up by financial issuance from Morgan Stanley, Bank of America Corp. and PNC Financial Services Group Inc.

The week’s deal supply came in lower than market participants expected with folks looking for volume in the $30 billion to $40 billion range.

About $20 billion to $25 billion of deals are anticipated to price next week, though the pipeline remains quiet with issuers in earnings blackout periods, sources said.

More than $100 billion of high-grade bonds have priced so far in the first month of 2023 with the bulk of action in the front half of the month.

Market participants were looking for about $130 billion of high-grade paper to print in January.

Stronger bank supply was expected this month as several notable U.S. bank issuers so far remain mum following the release of fourth-quarter earnings results, though sources are eyeing potential financial issuance in the upcoming week.

Appetite remained high with Morgan Stanley’s $6 billion deal on Tuesday garnering book demand of nearly $25 billion, a source said.

Morgan Stanley’s subordinated and longest-tenured tranche in the three-part offering saw the most demand with the $2 billion of 5.948% reset subordinated notes due 2038 (Baa1/A) finishing with final book orders of $10 billion.

The notes priced at a spread of Treasuries plus 243 basis points, tighter than talk in the 270 bps area.

Morgan Stanley, PNC firm

Financial supply so far this month has come from issuers including Deutsche Bank AG, Macquarie Bank Ltd., Royal Bank of Canada, Bank of Montreal, Credit Agricole SA, Credit Suisse AG, National Bank of Australia, Nomura Holdings Inc., Standard Chartered plc, Societe Generale, Sumitomo Mitsui Financial Group, Toronto-Dominion Bank and UBS Group AG.

In the secondary market, new bank supply has been mixed but trading mostly flat to tighter, sources report.

Morgan Stanley’s three tranches of notes broke about 8 bps to 10 bps better after pricing on Tuesday, a source said.

The bonds went out Friday even tighter on the long end, according to a market source.

Morgan Stanley’s 5.948% note firmed to 226 bps bid.

PNC’s $2.75 billion of fixed-to-floating rate notes due 2027 and 2034 (A3/A-/A) that priced Thursday traded nearly 10 bps better in the secondary market, a source said.

The $1.25 billion tranche of 4.758% green notes due 2027 printed 25 bps tighter than talk at a spread of Treasuries plus 100 bps. The issue was trading at 91 bps bid after pricing.

Corporate credit spreads stabilized this week – Moody’s Investors Service said its long-term average corporate bond spread averaged 149 bps, modestly softer than December’s average of 148 bps.

A few financial issuers saw implied rating declines in their credit default swaps over the past week ended Wednesday, according to a Moody’s report.

JPMorgan Chase & Co. and Wells Fargo & Co. posted CDS implied rating declines to Baa1 from A3 in the week ended Jan. 11.

Citigroup Inc. had CDS implied ratings of Baa2, down from Baa1 in the prior week, Moody’s said.

Meanwhile, CDS spreads from Credit Suisse (USA), Inc. tightened 57 bps over the past week ended Wednesday to a spread of 332 bps.

Inflows back

January marks the return of inflows to the high-grade market after outflows reigned in 2022.

Inflows of $3.04 billion in high-grade corporate investment funds were reported for the past week ended Wednesday with a year-to-date net inflow of $7.9 billion, according to Refinitiv Lipper US Fund Flows.

In the prior week, corporate investment-grade funds had inflows of $6.56 billion.

Corporate investment-grade funds had around $125 billion of net outflows for 2022.

U.S. high-grade funds and ETFs also reported inflows for the third straight week, according to a BofA Securities Inc. research note released Friday.

Inflows of $2.38 billion were posted for the past week ended Wednesday after a $6.48 billion inflow the previous week and a $1.84 billion inflow the week prior.

High-grade funds and ETFs ended December with a $13.6 billion outflow, BofA said.

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