Outlook 2014: High-grade primary issuance to decrease slightly in 2014 following record year

By Aleesia Forni

Virginia Beach, Dec. 31 - The high-grade primary bond market saw a frenzy of new issuance in 2013, but despite strong issuance conditions going into the beginning of the new year, many sources believe issuance will decline somewhat in 2014.

Sources are expecting $800 billion to $900 billion of new U.S. high-grade issuance in 2014.

When posed with the $1 trillion mark for supply in 2014, a source said he doubts high-grade supply would reach that level for the year.

"That seems pretty optimistic," he noted.

Issuance to slow in 2014

Following a year that saw two record-breaking mega deals, the pace of issuance in 2014 will likely not meet supply levels seen during the previous year.

More than $1.01 trillion of high-grade bonds were priced during 2013, breaking last year's record of $960.48 billion of high-grade bond issuance in 2012, according to data compiled by Prospect News.

"We expect issuance to be down from this year," a market source said. He noted that the bulk of that issuance should come at the beginning of 2014.

"Demand has been very strong for these new deals, and I think that should carry over into at least the beginning of next year," he added.

"At this moment, conditions for new issuance are great," another source said.

Another source agreed that issuance is expected to fall "somewhat less in 2014 compared to 2013."

The source added that high-grade primary activity from the financial sector is expected to pick up in the year ahead.

Apple, Verizon break records

Size records for new issues in the high-grade bond market were blown away during 2013, with two companies shattering the previous records.

Apple Inc. blazed into the high-grade bond market in late April, selling $17 billion of notes spread across six tranches.

At its highest, demand for the deal was seen around $50 billion.

However, the record was again shattered in September, as Verizon Communications Inc. priced a $49 billion offering in eight parts.

Verizon's deal was originally expected to come in at between $20 billion and $30 billion, but one source noted that the size ballooned due to investor interest and cheap prices.

One market source saw the deal's order book reach a "massive" $100 billion.

Proceeds were to be used to finance Verizon's acquisition of Vodafone's 45% ownership in Verizon Wireless.

These trades easily bested the previous records for a non-financial issuer. That record was held by Roche, the Basel, Switzerland-based health care and pharmaceutical company that priced $16 billion in six tranches on Feb. 18, 2009. More recently, AbbVie, Inc. offered $14.7 billion in six tranches on Nov. 5, 2012.

Fed taper in focus

Following the release of positive economic data, including stronger-than-expected jobs data, the Federal Reserve announced in mid-December that it would begin tapering its bond-purchasing program in early 2014.

This decision is poised to have "big consequences for markets around the world," according to a report from Bank of America.

The report continued, saying "spreads will tighten and the outlook for total returns will be challenging."

The Federal Reserve commented in May on the possibility of pulling back on quantitative easing efforts, such as bond buybacks, that were put in place during the financial crisis.

Though the pace of the taper is expected to be "gradual," one source said that the taper "will have an impact like everything else."

The Fed announced on Dec. 18 that it would in fact begin tapering its monthly bond-buying program to $75 billion a month from $85 billion.

Volatility an issue

Market volatility will continue to play a role in the high-grade bond market in the year ahead, sources said.

"There is a lot of uncertainty out there," a market source said.

"As spreads tighten and yields in the U.S. rise because of tapering by the Federal Reserve, total returns across global markets in 2014 look meager," said Hans Mikkelsen, credit strategist at BofA Merrill Lynch Global Research.

"Look for volatility to increase as well. We can say fairly confidently that it's likely to be a bumpy ride for credit investors."

'Great rotation' to continue

The idea of a "great rotation" out of bonds and into equities - a theme that was on the minds of market players for 2013 - is expected to carry over into 2014.

"The siren song of equities will lure retail investors away from U.S. investment-grade bonds, even in sectors whose returns are positive in 2014," according to a report from BofA Merrill Lynch.

"But institutional investors, including insurers, sovereign wealth funds and foreign central banks support U.S. corporate bonds."

Investors are likely to continue to shift away from bonds and into equities during the year, as the bull bond market comes to an end.

"In 2013, we saw the 30-year bull market in bonds wind down and stocks soar, with a stronger recovery since 2009 than in the last five market cycles," said Candace Browning, head of BofA Merrill Lynch Global Research.

The report added that this trend is expected to "moderate but continue forward" even with the Federal Reserve tapering in 2014.

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