The day after the US elections, which saw Donald Trump win the presidency and maybe Republican control of Congress, US stocks are soaring, US Treasury yields are sharply higher, corporate bond primaries are idle and the Federal Reserve is kicking off its two-day FOMC meeting.
With political uncertainty a non-issue this morning, markets are moving at a blistering pace, including a very rattled commodities market. The ECM arena is expected to get very busy over the next few weeks.
"The financial market response to President Trump’s resounding victory in the US Presidential election last night has thus far aligned with expectations with equities, bonds yields, and the US dollar all significantly higher in early trading," BMO said in a report today.
In the corporate secondary, the IG CDX five-year index this morning tightened to 49.289bp and the HY CDX five-year index edged up to a dollar price of US$107.898, according to LSEG data.
"The credit response thus far has also met expectations with CDX spreads 2.5bp narrower this morning and early indications of IG index spreads suggesting a rally of at least 3bp," BMO said. The average IG bond spread edged in by 2bp to 84bp on Tuesday and the HY bond spread narrowed by 1bp to 286bp, according to IFR data.
"With the move this morning, spreads are now at new 25yr lows adjusting for ratings changes," BMO said. No offerings were priced in the investment-grade or high-yield primaries yesterday. And no economic data releases are expected today.
Regarding the Fed, Well Fargo Economics said in a report today that their current forecast looks for the FOMC to cut its target range for the federal funds rate, currently 4.75%-5.00%, to 3.00%-3.25% by the end of next year.
"However, the FOMC may not want to ease policy by that much if new tax cuts and tariffs cause inflation to shoot higher over the next couple of years," Wells Fargo said. "Thus, we think the risks to our fed funds rate forecast are skewed to the upside i.e., less easing next year than we currently project."
The CME FedWatch Tool this morning forecasts a 99.1% probability that the FOMC will cut the fed funds rate by 25bp on Thursday.
Looking at the credit markets, BMO said, "From a policy perspective, the impact of Trump (and likely a red sweep) has a mixed impact on credit."
On the positive side are President-elect Trump’s pro-growth policies, including an extension of 2017 tax cuts as well as higher government spending, BMO said. In addition, increased bank regulation in the form of the Basel Endgame can now be expected to be either significantly further watered down or scrapped altogether at least for the next four years, BMO said.
On the other hand, there are some potentially negative impacts from a red sweep as well, BMO said.
"Trump has repeatedly campaigned on a promise of higher tariffs and a significant increase in deportations/controls on immigration, a combination of policies likely best described as stagflationary," BMO said.
Also, Trump's victory also likely results in US Treasury yields being higher.
"While higher yields should translate into higher demand for credit, they will also likely pressure both equity valuations as well as corporate balance sheets as refinancings increase in the quarters ahead," BMO said.
HIGH GRADE
The US investment-grade bond market is not expected to draw fresh offerings today, with issuance forecast to stay muted for the rest of the week.
So far, there has only been one deal for the investment-grade primary this week, from Canadian telecom company Videotron.
LEVERAGE/HIGH YIELD
The primary market is starting to open up on Wednesday.
Champ Acquisition has announced a US$500m seven-year non-call three offering. Proceeds are going to refinance debt and to pay a dividend to Platinum Equity.
The borrower, which makes commemoration products such as yearbooks, is holding investor calls today and marketing is expected to end on November 12.
In the secondary markets, one of the biggest movers this morning is the 8.625% 2029 issued by Geo Group, a prison operator.
Those bonds were changing hands at a dollar price of 106.20 earlier this morning, up from 104.25 on Tuesday afternoon, according to MarketAxess data.
STRUCTURED FINANCE
Securitized supply is expected to accelerate as activity had been capped by some uncertainty about the outcome of the US elections.
Still, dealmakers managed to price two non-agency CMBS issues yesterday that raised a combined US$415m and a Freddie Mac multifamily deal that brought in US$815.8m.
Based on issuer filings with the Securities and Exchange Commission, the supply pipeline is sparse but is expected to grow in the coming days, market participants said.
LATAM
Plastics producer Braskem will buy back US$368.6m of its outstanding subordinated notes due 2081. The tender offer expired yesterday.
Citigroup, Itau, Morgan Stanley, Santander and SMBC were dealer managers on the buyback.
EQUITIES
US ECM bankers wasted no time getting back to work following US President-elect Donald Trump’s decisive election victory.
Digital Realty Trust early Wednesday launched a US$1bn CB sale, getting the ball rolling as bankers look to exploit what could be a robust deal environment in the final two months of year now that the election is out of the way.
A syndicate led by Bank of America, Citigroup and JP Morgan is marketing the data center owner’s sale of five-year exchangeable bonds across Wednesday’s session at a 1.875%-2.375% coupon and 20%-25% conversion premium.
Digital Realty expects to use the proceeds to repay revolver borrowings, fund acquisitions and developments, and provide working capital.
Issuers still have to negotiate the outcome of Thursday’s FOMC meeting, though markets are already pricing in a 25bp rate cut.
Bankers said earlier this week that a good number of issuers were ready to launch offerings pending the election outcome.