Morning Commentary: High-grade supply quiets after heavy deal week; Fed ups bond buys

By Cristal Cody

Tupelo, Miss., June 19 – Investment-grade supply quieted at the start of Friday’s session following nearly $60 billion of deal volume over the week.

Supply was carried by several multiple-tranche bond offerings from issuers including T-Mobile U.S. Inc. subsidiary T-Mobile USA, Inc. on Thursday, Upjohn Inc. on Wednesday and Pacific Gas and Electric Co. on Tuesday.

Volume beat market forecasts for the week.

About $20 billion to as much as $40 billion of supply was expected by market participants.

Meanwhile, the Federal Reserve’s bond buying program is picking up speed.

On Monday, the Federal Reserve Board announced updates to the secondary market corporate credit facility created under the Cares Act.

Under the facility, the Federal Reserve Bank of New York will lend to a special purchase vehicle, which will purchase corporate bonds and exchange-traded funds that meet criteria including ratings and maturity.

The Department of Treasury will make a $75 billion equity investment in the vehicle to support both the primary and secondary facilities.

The primary market facility will initially be allocated $50 billion, while $25 billion will go toward the secondary market facility. The combined size of both facilities will be up to $750 billion.

The program is set to expire on Sept. 30.

The Federal Reserve’s weekly H.4.1 report shows that the corporate credit facilities held $38.92 billion as of Tuesday, up $1.54 billion from the week prior, including $7.04 billion invested in corporate bonds and ETFs and $31.88 billion in Treasuries, according to a BofA Securities, Inc. research note released Friday.

“That implies the Fed bought $308 [million]/day of corporate bonds and ETFs on average this past week, up from the $244 [million] pace the prior week and roughly $300 [million]/day the first three for ETFs only,” BofA analysts Hans Mikkelsen and Yunyi Zhang said in the note.

“Since this week's purchase program includes five days of ETFs and one day of corporate bonds, assuming the Fed bought $244 [million]/day of ETFs as they did the prior week, that implies they bought $322 [million] of bonds on Tuesday,” the analysts said. “This suggests that SMCCF is not merely switching away from ETFs into corporate bonds, but using corporate bonds to increase daily purchases.”

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