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Investment-grade debt issuance rises despite earnings blackouts

Phalguni Soni

Must-know: Corporate debt market reactions to FOMC minutes (Part 5 of 9)

(Continued from Part 4)

Deals and volumes summary in the investment-grade bond market

The week ending July 11, saw weekly investment-grade bond (LQD) issuance top $20 billion for the 21st time this year. Although there was no issuance last Thursday and Friday, issuance volumes in the week ending July 11 totaled $21.1 billion over 21 issues. This was ~3% higher compared to the previous week.

Total issuance in the week ending July 4, came in at $20.45 billion, over eight transactions. Last week brings the total issuance to $829.4 billion year-to-date (or YTD) (Source:Bloomberg).

Issuance has been lower for the past couple of weeks, in large part due to the blackout period preceding the quarterly earnings releases for many corporate borrowers.

What are investment-grade bonds?

Investment-grade bonds are rated BBB- and above, as per the Standard & Poor’s ratings system. Higher ratings imply lower credit or default risk, while lower ratings imply the opposite. Since investment-grade bonds are deemed to have lower credit risk compared to high-yield bonds, the rates of interest that borrowers pay are also lower.

The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invests primarily in investment-grade bonds issued by U.S. corporate borrowers. LQD has holdings in large cap companies like Goldman Sachs and Verizon Communications. Both companies are also part of the S&P 500 Index (SPY).

The Vanguard Total Bond Market ETF (BND) and the iShares Core Total U.S. Bond Market ETF (AGG) primarily invest in investment-grade bonds, issued by both corporates and the U.S. Treasury.

Issuance by maturity and quality

Investment-grade borrowers continued to prefer fixed-rate debt issues—~87% of the total issuance was fixed-rate in the week ending  July 11, which was slightly lower than the ~91% in the previous week. With interest rates expected to increase sometime in 2015, most borrowers are looking to lock in interest rates which are at near-historical lows.

BBB-rated borrowers were the most prolific borrowers accounting for ~36% of total issuance in the week ending July 11. Seven-year maturities were the most popular, accounting for ~49% of the total issuance.

Issuance by sector

Financials sector firms were the dominant issuers in the week ending July 11—accounting for ~58% of issuance volumes. In the next section, we’ll look at the prominent issues that hit the investment-grade primary market last week, both in the financials sector (XLF) as well as other sectors. Please continue reading the next sections in this series.

Continue to Part 6

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