As earnings season picks up, so does investment-grade bond issuance

Market Realist

Why demand is rising for Treasuries and investment-grade bonds (Part 3 of 5)

(Continued from Part 2)

Bull run

Earnings season comes four times a year. Each season releases the quarterly earnings of a large number of publicly traded companies for the period ended December, March, June, or September. Last week was the follow-up week on the December 2013 releases. According to Street analysts, many corporates in the S&P 500 (SPY) that have reported earnings have gone on to beat estimates on an earnings per share basis. On a similar note, last week, investment-grade bonds (LQD) posted the straight sixth week in a row of positive issuance as suppliers looked to take advantage of the bull run in the market.

Issuance was up 15%, to $18.5 billion from the $16.1 billion in issuance the previous week. A total number of 23 issuers came to market, with an average ticket size of $800 million—slightly lower than the over $1 billion we saw the previous week, when 16 issuers came to the market.

The year-to-date issuance was $29.1 billion, compared to year-to-date issuance of $12.5 billion in the beginning of the year 2014 .

Last week’s issuance was up on the reaction of the declining U.S. ten-year Treasury rate. Investment-grade corporate bonds pay either fixed-term and floating interest rates that reference a benchmark such as LIBOR. FRN (floating rate note) debt security tends to adjust its interest rate with changes in the prevailing market interest rates, unlike fixed-interest-rate bonds.

Full year 2014 issuance activity

Issuance in the week of January 31, 2014, was affected on the theme of emerging market concerns, which showed turbulence on the news of the Fed’s bond buying of $65 billion a month. A week after, on February 7, 2014, issuance rebounded strongly, mostly driven by good fundamentals from financial companies such as American International Group, Inc. (AIG), which reported quarterly earnings and revenue that easily beat analysts’ expectations. However, the domestic economic indicators were mostly mixed, except for surprise in the non-farm payroll data, which was lower than expected, at 113,000 in January 2014 . Non-farm payrolls are an employment report released monthly, usually on the first Friday of every month. They heavily affect the country’s currency market, the bond market, and the stock market. The follow-up weeks were impacted by the harsh cold weather, but issuance moved a bit following Janet Yellen’s semi-annual monetary policy testimony before the Senate Banking Committee in Washington on February 13, 2014, where she confirmed the continuation of the taper.

To learn about fund flows in investment-grade bonds last week, read on to the next part of this series.

Continue to Part 4

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