High-grade supply quiet after strong issuance; lighter volume eyed; Pacific Gas mostly widens

By Cristal Cody

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

Supply was led by 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 of about $20 billion to as much as $40 billion for the week.

Looking ahead to next week, pricing action is expected to slow to about $25 billion of issuance, syndicate sources report.

High-grade credit spreads continued to widen Friday after tightening about 10 basis points in the first two sessions of the week.

The Markit CDX North American Investment Grade 33 index softened nearly 4 bps to a spread of 77.95 bps.

New issues priced this week were mixed with Pacific Gas and Electric’s bonds mostly weaker in heavy secondary trading, sources said.

Pacific Gas and Electric’s $8,925,000,000 of first mortgage bonds (Baa3/BBB-/BBB-) priced in six tranches on Tuesday as part of its reorganization funding from Chapter 11 bankruptcy widened about 12 bps to 20 bps across most of the tranches.

A $2.5 billion tranche of 1.75% bonds due June 16, 2022, priced with a spread of Treasuries plus 155 bps, firmed about 5 bps.

Initial talk was in the 200 bps over Treasuries area.

The company’s $2 billion of 2.5% bonds due Feb. 1, 2031 eased about 17 bps from where the tranche priced at a Treasuries plus 175 bps spread.

Initial price talk was in the 237.5 bps over Treasuries area.

T-Mobile USA’s $4 billion of senior secured notes (Baa3/BBB-/BBB-) priced in three tranches in a Rule 144A and Regulation S offering on Thursday traded flat to about 1 bp tighter.

T-Mobile’s $1.75 billion tranche of 2.55% notes due Feb. 15, 2031, priced at a Treasuries plus 187.5 bps spread, were mostly wrapped around issuance.

The notes were talked to price at the Treasuries plus 215 bps area with guidance firmed to the 190 bps area, plus or minus 2.5 bps.

Fed bonds buys

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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