The US investment-grade primary remains active on Tuesday, albeit at a slower pace than yesterday, with at least four offerings slated for sale on the eve of the Federal Reserve's rate decision. The high-yield arena expects one issue to price today.
More economic data releases are hitting the market today, starting with a mild, lackluster retail sales report this morning, adding to the growing sentiment that the FOMC will cut the fed funds rate by 50bp, instead of 25bp, tomorrow. In the wake of the sales report, the CME FedWatch forecast a probability of 67% for a 50bp cut, while it projected 33% for a 25bp reduction.
Deutsche Bank Research noted today that if there was no informed Fed sources massaging the market back down to 25bp by the close of play last night, then the consensus was that this implied that the Fed is leaning towards 50bp tomorrow.
US stocks opened the morning session sharply higher, while US Treasury yields meandered, with the benchmark 10-year note yield hovering around 3.65%, after hitting 3.59% earlier this morning, its lowest yield since June 1, 2023.
US Treasuries are mixed in the wake of the data with the front-end coming under pressure while the 10-year and 30-year sectors outperformed, BMO said in a report after the data releases.
"Markets are pricing a ~60% probability of a 50bp Fed cut on Wednesday. Such high uncertainty is unusual so close to the meeting and the resulting elevated risk of volatility is not good for spreads," Bank of America Research said in a report late yesterday. "However, what matters a lot more is not 25 or 50bp in September 2024, but the 235bp of cuts the market is pricing by June 2025."
The demand for duration, including IG corporates, has been very strong, driven by the expectations of the rapid cutting cycle that the Fed will kick off on Wednesday, BofA said. "That demand should continue supporting the strong IG bond market technicals regardless of how much the Fed cuts on Wednesday," the bank said.
In the IG primary on Monday six issues were priced totaling US$8.15bn, lifting September IG volume to US$127.95bn, according to IFR data. The average NIC for yesterday's IG deals was 2.64bp and the average order book was 3.59x, according to IFR data. The average move tighter from initial price thoughts to pricing for the issues was 24.909bp.
"Given expectations for light supply over the back half of the week given tomorrow’s FOMC meeting, today will likely need to be large if the week is going to hit expectations for approximately $23bn in IG supply this week," BMO said.
In the HY arena, two issues were priced totaling US$2.4bn, pushing September HY volume to US$22.505bn, according to IFR.
The average IG bond spread edged in by 1bp to 98bp on Monday and the HY bond spread tightened by 5bp to 332bp, according to ICE BofA data.
"High grade spreads were unchanged or modestly narrower during yesterday’s session on the back of very strong volumes running 25% ahead of the average pace for a Monday over the past year," BMO said.
HIGH GRADE
At least four high-grade bond offerings are expected to price on Tuesday.
Packaging company Sonoco Products is issuing a three-part bond with tenors ranging from two to 10 years. Proceeds from the bond and a term loan will be used to finance its US$3.9bn acquisition of Eviosys.
Texas-based natural gas distributor Atmos Energy announced an offering of a 30-year senior note.
Mexican state-owned utility Comision Federal de Electricidad is issuing five and 10-years senior unsecured sustainability bonds. Hospital management company Universal Health Services is also targeting the same maturities in its senior secured note offering today.
LEVERAGE/HIGH YIELD
Activity in the primary market for US high-yield bonds continues at a steady pace as more issuers emerge to raise funding on Tuesday.
Alpha Generation has started marketing an US$800m eight-year non-call three offering as part of a US$2.75bn funding package that also includes a term loan B.
The newly formed independent power producer is using proceeds to repay debt at subsidiaries and to reset energy hedges. Pricing is expected on Friday.
The market is also seeing another subordinated deal from a high-grade borrower today with Air Lease announcing a US$300m perpetual non-call five with a fixed-rate reset.
The aircraft leasing company has set initial price thoughts of 6.75% area on the deal, which is expected to price today.
Yesterday AltaGas sold a US$900m 30-year non-call 10 junior subordinated issue with a yield of 7.20%, tighter than IPTs of 7.50%-7.625%.
STRUCTURED FINANCE
Several US asset-backed offerings could price today after at least seven deals moved into guidance phase yesterday.
Dealmakers intend to complete up a good portion of this week's supply ahead of the Fed's rate decision tomorrow.
One of this week's biggest issues is a US$1.29bn prime auto securitization from Ford. Guidance on the deal's Triple A rated note that carries a weighted-average life of 2.46 years is Treasuries plus 60bp-62bp.
Another sizable deal is the US$1.2bn subprime auto offering from Santander. Guidance on the Triple A rated tranche with a 0.64-year WAL is plus 63bp-65bp.
Outside of the auto sector, CNH is seeking to raise US$906.4m with its third equipment offering of the year. Guidance on the Triple A rated tranche that has a 2.71-year WAL is plus 64bp-66bp.
Meanwhile, the commercial mortgage bond market is bracing for a lively week.
A US$738m five-year conduit and a US$400m hotel SASB deal are slated for sale later this week after three CMBS issues brought in in nearly US$2.2bn yesterday.
LATAM
Mexico's Comision Federal de Electricidad is returning to the dollar market after a two-year absence. The state-owned electric power giant is expected to price today an offering of long five and a long 10-year sustainable senior unsecured bonds. Initial price thoughts are in the areas of 6.15% and 6.95%, respectively.
BBVA, Bank of America, Citigroup, HSBC and Mizuho are the global coordinators on the transaction.
InterCement announced yesterday that it has submitted an out-of-court restructuring plan to a Brazilian court, following its approval by more than one-third of its creditors.
EQUITIES
Upstart kicked off an already busy week for equity-linked issuance by raising US$375m from an upsized five-year convertible bond, enabling the once-hot fintech to buy back some of an existing CB that is far out of the money.
After a day of marketing, Barclays and Goldman Sachs priced the new CB at a 2% coupon and 30% conversion premium versus price talk of 1.75%-2.25% and 27.5%-32.5%.
The syndicate found enough demand to upsize the offering from US$300m.
Upstart shares closed Monday’s session at US$35.12, implying a US$45.66 conversion price for the new CB.
The company is using some of the proceeds to buy back half of the US$661m outstanding on a 0.25% CB due in 2026.
The 0.25% CB is convertible into stock at US$285.26 a share. To help bridge the gap, Upstart is using some of the proceeds to fund a call spread to offset dilution arising from the new security up to US$70.24, a 100% premium.
The need to refinance low-cost CBs sold in 2020-21 has been a rich source of new issuance for structured equity bankers.
File-sharing software firm Box is looking to refinance an existing CB with proceeds from the US$400m sale of a new five-year security pricing after Tuesday’s close.
Elsewhere, Michael Saylor's MicroStrategy is using proceeds from the US$700m sale of a four year/put three CB to tender for outstanding 6.125% bonds.
The deal marks MicroStrategy’s fourth CB this year alone, helping it to amass about US$14bn of bitcoin.
After pitching investors at recent healthcare conferences, Nuvalent tapped into a buzz surrounding its two promising cancer drugs by raising a significantly upsized US$500m from a follow-on stock sale originally sized at US$350m.