With no offerings expected to price in the US investment-grade and high-yield corporate primaries, the marquee event of the day is the conclusion of the two-day Federal Reserve FOMC meeting and the rate cut that is expected to be announced this afternoon, as well as the keenly awaited "dot plot".
"Heading into likely the most consequential FOMC meeting of the year thus far, an uncommon amount of uncertainty remains over the outcome of this afternoon’s meeting," BMO said in a report today. "Interest rate futures continue to suggest a 66% chance for a 50bp cut, down modestly after yesterday’s retail sales data surprised to the upside."
The evolution of the economic data in recent weeks is just one of the reasons to expect a 25bp rate cut, BMO said. Another is the potential for the FOMC to deliver a “dovish” 25bp cut, either via the dot plot or by announcing a plan for the end of balance sheet normalization, in lieu of a 50bp cut, BMO noted.
"Further, it’s worth noting that the FOMC has been relatively slow in adjusting monetary policy since the pandemic," BMO said. "They were slow in ending QE, and they were similarly slow in turning to rate hikes, which ultimately necessitated a very rapid rise in policy rates."
Deutsche Bank Research said, "You'd have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today."
The market dial between 25bp and 50bp continued to waver over the last 24 hours, Deutsche Bank said. It had marginally shifted it back towards 25bp earlier yesterday, as neither the retail sales nor the industrial production data suggested the economy was heading into a sharper downturn.
If the Fed does cut by 25bp, then Deutsche Bank Research economists expect the median dot plot to show two further 25bp cuts this year, and then a string of reductions in 2025 that take the fed funds rate much closer to neutral by the end of 2025.
"Either way, they think Fed Chair Powell will face a communications challenge, as a 25bp cut would raise questions about the Fed falling behind the curve, whereas a 50bp cut would mean Powell needs to avoid sending negative signals about the economy," Deutsche Bank said.
The economic data slate is light today, with housing data out already this morning.
The IG primary on Tuesday saw four offerings priced totaling US$4.95bn, pushing weekly IG volume to US$13.10bn and September issuance to US$132.90bn, according to IFR data. Yesterday the average new issue concession for the IG slate of issues was 3.17bp and the average book cover was 6.04x subscribed, according to IFR. The average move from initial price thoughts to pricing tightened by 32.625bp.
In the HY primary yesterday two issues were priced totaling US$975m, lifting weekly volume to US$3.375bn and September issuance to US$23.480bn, according to IFR.
The average IG bond spread narrowed by 1bp to 97bp on Tuesday and the HY bond spread tightened by 7bp to 325bp, according to ICE BofA data.
"High grade spreads narrowed 1-2bp yesterday on extremely strong volume running 53% above the average Tuesday over the past year according to TRACE statistics," BMO said.
HIGH GRADE
No new high-grade bond offerings are expected to price on Wednesday, after four deals priced yesterday.
The biggest deal on Tuesday came from Sonoco Products. The US packaging maker printed a US$1.8bn three-part senior unsecured note, comprising two, five and 10-year tranches.
The three other offerings were from utility Atmos Energy, Mexico's Comision Federal de Electricidad and hospital management company Universal Health Services.
LEVERAGE/HIGH YIELD
No high-yield bonds are expected to price today, after two issuers raised US$975m on Tuesday.
Yesterday’s biggest deal came from healthcare services company HAH Group, which priced an upsized US$675m offering of seven-year non-call three bonds at par to yield 9.75%, the wide end of talk. Proceeds will be used to refinance debt and pay a distribution to shareholders.
The other deal came from Air Lease. The Los Angeles-based company printed a US$300m offering of perpetual non-call five preferred securities at 6%, the tight side of guidance.
STRUCTURED FINANCE
The securitization primary is expected to pause today as dealmakers await the Fed's rate decision this afternoon.
Yesterday, a wave of offerings from a variety of assets printed. A dozen of asset-backed issues raised more than US$9bn, while seven RMBS deals priced over US$3bn. A US$400m commercial mortgage bond was sold as well.
There are a few more offerings slated for sale this week: a US$633m aircraft securitization from Apollo's PK AirFinance business, a US$658.6m five-year CMBS conduit deal and a US$255.6m non-QM deal from Balbec.
LATAM
Comision Federal de Electricidad raised US$1.5bn yesterday from a two-part sustainable senior unsecured bond offering.
The US$500m of long five-year note priced to yield 5.75% or 230.5bp over US Treasuries. The US$1bn long 10-year note priced to yield 6.5%, or 285.1bp over US Treasuries.
BBVA, Bank of America, Citigroup, HSBC and Mizuho were the global coordinators.
Fitch said yesterday that the Peruvian government’s "latest financial support package for Petroperu is a positive step, preventing the company from defaulting," but did not change its CCC+ rating on the issuer.
LatAm sovereign five-year CDS yesterday tightened 4bp for Brazil, 3bp for Colombia, 2bp for Peru and Chile, and 1bp for Mexico, according to Lucror Analytics.
EQUITIES
MicroStrategy secured an upsized US$875m from its fourth convertible bond this year, allowing the crypto hoarder to lower its borrowing costs and help fund billionaire CEO Michael Saylor’s bitcoin buying spree.
Barclays, Mizuho and TD Cowen priced the four-year/put-three CB at a 0.625% coupon and 40% conversion premium, an investor-friendly outcome versus the price talk of 0.125%-0.625% and 40%-45%.
The offering was materially upsized from the original US$700m target.
MicroStrategy is using US$500m of the proceeds to redeem its 6.125% secured notes due in 2028.
As with its previous CB offerings, MicroStrategy is using the remaining proceeds to buy more bitcoin.
In a more typical CB refinancing, file-sharing software firm Box raised US$400m from the sale of a new five-year CB that will allow it to buy back part of an existing security.
Morgan Stanley, JP Morgan and Bank of America priced a full-sized offering at a 1.5% coupon and a 30% premium after marketing for one day through Tuesday’s session at 1.5%-2% and 27.5%-32.5%.
Box shares closed Tuesday's session at US$33.33, putting the initial conversion price at US$43.46. The company is spending some of the proceeds on a capped call to offset dilution up to US$66.86, a 100% premium.
Box is using US$191.7m of the proceeds to buy back US$140m of principal on a zero-coupon CB due in 2026, or 40.5% of the US$345m outstanding.
Straight equity issuance was mostly quiet ahead of Wednesday’s rate cut, though Casella Waste Systems raised US$450m from an upsized overnight stock sale to help fund a recent acquisition.
A syndicate led by Raymond James and JP Morgan priced 4.5m shares of the waste management company at US$100, a 6.3% discount to Tuesday’s US$106.73 closing price. The offering was upsized from US$400m at launch.