Why the investment-grade bond issuance rebounded sharply last week
Market activity update: The Treasuries and investment-grade bonds (Part 5 of 7)
Forward pedaling
Last week, the investment-grade bond issuance rebounded sharply as the Treasury yields in the intermediate sector of the curve declined, while the long-term Treasuries gained on account of mixed economic data. The U.S. ten-year Treasury yields remained unchanged at 2.72% and 30-year Treasury yield increased by 4 basis point to 3.58%. About 19 deals were printed worth $19.5 billion—$4 billion higher than the previous weeks’ issuance of $15.5 billion. In the previous week, the number of issuers who tapped the investment-grade bond market was 9. The average ticket size of the issuance increased to $1.03 billion—40% lower from the previous weeks’ average ticket size of $1.72 billion.
Investment-grade corporate bonds (LQD) pay either fixed-rate and/or floating interest rates that refer to a benchmark such as LIBOR. Floating rate debt security’s coupon payment adjusts with change in the prevailing market interest rates, unlike fixed interest rate bonds such as Treasury bonds (TLT) and high yield bonds (JNK) where the coupon is fixed at the time of issuance and does not change till maturity.
The majority of the bond proceeds were issued by companies from the financial sector followed by the consumer staples sector. Some of the major deals came from Citigroup Inc. (C) and Deutsche Bank AG (DB). The Union Electric of Missouri First Mortgage Bond Company issued a $350 million ten-year tranche that was nearly six times oversubscribed, priced 10 basis points inside of initial price whispers, and traded 4 basis points tighter on the break price. The break price refers to the price at which the bond first trades in the secondary market after its initial placement in the primary market. When deals are traded at the tight end of talks, it suggests higher demand for the issuance. A wide end of talks refers to unwillingness to buy the security at the price offered by the issuer.
Investment grade corporate spreads tightened as investors’ perception reflected on the risk premium demanded to hold corporate bonds over Treasuries declined.
Despite the fact that the U.S. investment-grade bond market has grown 53% since 2008, with companies selling $6.9 trillion of notes since then, according to data compiled by the Securities Industry and Financial Markets Association and Bloomberg, the bondholders (investors) are showing an unwillingness to hold the security as the Fed’s stance on its current monetary policy continued its posture.
Move on to the next part of the series to learn more on last week’s funds flow activity.
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