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Bond Sales to Taper Ahead of Rate Hike: U.S. Credit Week Ahead

·3 min read

(Bloomberg) -- After a surprise $45 billion haul largely from top Wall Street banks, expect high-grade debt deals to slow down drastically next week.

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Underwriters are forecasting between $15 billion to $20 billion, with issuance front-loaded before the Federal Reserve’s widely expected 75 basis point interest-rate hike on Wednesday, according to Bloomberg’s Michael Gambale. July volume currently stands at $68.8 billion, well within reach of the $80 billion projected for the month, per Gambale.

Big US banks, which were supposed to be done with much of their borrowing for the year, flooded the market with new bond deals this week. Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Morgan Stanley accounted for 61% of over $45 billion that priced this week, making it the busiest week since mid-April. And Goldman Sachs Group Inc., which hasn’t announced an offering, will probably still issue debt in the coming days, according to Bloomberg Intelligence credit analyst Arnold Kakuda.

Economists surveyed by Bloomberg expect the Fed Chair Jerome Powell to raise interest rates by 75 basis points next week, slowing the pace to a half-percentage point in September, then shifting to quarter-point hikes at the remaining two meetings of the year.

The central bank’s telegraphed rate hikes into a slowing economy mean the risk of wider credit spreads is higher than a scenario of tighter spreads, according to Nicholas Elfner, co-head of research at Breckinridge Capital Advisors in Boston. Barclays Plc sees an economic slowdown hitting credit markets anew over the next six months, lifting risk premiums to levels associated with recessions.

“We expect spread volatility to continue with a widening bias in investment-grade as the risk or probability of recession increases,” said Elfner.

Read more: Barclays Sees Recession Fears Hitting Credit Later This Year

Corporate earnings from tech and industrial heavyweights kick off in earnest next week, with Apple Inc., Alphabet Inc., Amazon.com, Inc., Boeing Co., General Electric Co. and General Motors Co. becoming candidates to sell bonds.

The high-yield primary market has slowed to a trickle as borrowers remain on a wait-and-watch mode ahead of the next Fed meeting. Issuance so far this year stands at $69 billion, a 77% plunge from about $301 billion issued from the same period last year, according to data compiled by Bloomberg News.

A club of banks led by Citigroup and BofA has postponed the $5.4 billion buyout financing that was meant to launch this month to help fund Apollo Global Management Inc.’s acquisition of Tenneco Inc. The lenders have decided to launch the leveraged loan and high-yield bond offerings after the US Labor Day holiday.

Steep Discounts

The US leveraged loan market tone was mixed this week ahead of its August lull when market participants take off for vacation and banks’ European head offices shut down. Just three companies came forward with offerings this week, and only four are left in general syndication.

Most deals lately have required steep discounts in order to get done. A group of lenders led by Deutsche Bank AG and UBS Group AG lost around $200 million on the financing for Clayton Dubilier & Rice’s buyout of Cornerstone Building Brands Inc., as they struggled to offload the debt to investors, according to people with knowledge of the matter. The hit on the Cornerstone deal is one of the steepest for banks this year.

Read more: Deutsche Bank, UBS-Led Group Hit With $200 Million Buyout Loss

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