Morning Commentary: Investment-grade primary market quiets; corporate bond flows eyed

By Cristal Cody

Tupelo, Miss., April 12 – The investment-grade bond market quieted early Friday with no reported issuers on deck for the session.

Corporate issuers priced more than $8.5 billion of high-grade bonds over the week, compared to about $15 billion to $20 billion of supply syndicate sources expected.

For the week ended April 10, Lipper US Fund Flows reported corporate investment-grade fund inflows rose to $3.47 billion from $2.9 billion in the previous week and $2.75 billion in the prior week.

Inflows to U.S. bond funds and ETFs declined for the past week to $2.87 billion from $8.95 billion a week earlier, according to a BofA Merrill Lynch research note released on Friday.

“The slowdown was broad-based, with most major fixed income asset classes reporting weaker flows, including high grade, high yield and government bonds,” BofA Merrill Lynch strategist Yuri Seliger said in the note. “Some of that money was apparently redirected to equities, where flows turned positive with a $2.66 [billion] inflow after a [$730 million] outflow in the prior week.”

Buying of high-grade bonds declined to $2.74 billion for the week ended Wednesday from $6.32 billion in the previous week.

“Investors actually turned small net sellers of short-term high grade,” Seliger said of a $150 million outflow, down from a $2.45 billion inflow a week earlier.

Flows remained positive excluding short-term high-grade but declined to $2.89 billion this past week from $3.87 billion a week ago.

The slowdown in demand was mostly driven by funds, down to $1.42 billion from $4.43 billion, rather than ETFs, which declined to $1.32 billion from $1.89 billion, Seliger said.

High-grade deal volume this week was led by Avolon Holdings Ltd.’s upsized $2.5 billion three-part sale of guaranteed senior notes on Thursday.

The company’s $750 million tranche of of 4.375% notes due May 1, 2026 was quoted about 1 basis point better than issuance in secondary trading, a source said. Avolon sold the notes with a spread of 205 bps over Treasuries.

Secondary market volume this week included $19.88 billion of high-grade bonds traded on Thursday, $22.07 billion on Wednesday, $22.38 billion on Tuesday and $19.21 billion on Monday, according to Trace data.

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