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US Junk Issuance Set to Weaken After Deal Rally

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(Bloomberg) -- The thaw in the US high-yield primary market may prove short-lived as worries about inflation and higher borrowing costs persist, with Federal Reserve Vice Chair Lael Brainard noting that half-point interest rate hikes this month and next are “reasonable.”

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The recent momentum in junk issuance is showing signs of fading after a deluge of new deals from a variety of borrowers over the course of the week. About $7 billion of fresh debt was issued amid a fierce high-yield rally triggered by Fed Reserve policy minutes that hinted at a let-up in monetary tightening. That momentum has somewhat faded since, as economic concerns continue to swirl.

Spreads across BB corporate bonds are “too tight for comfort,” warned Barclays Plc credit strategists. The macro picture remains gloomy in both the US and the rest of the world, Bradley Rogoff, head of fixed income research at the bank, wrote in a note Friday. “We expect volatility to remain elevated as the Fed tries to find the right balance.”

There is only one junk-bond sale on the docket for next week: Satellite telecom company Maxar Technologies Inc. is selling a five-year bond to finance the redemption of its 9.75% senior secured notes maturing next year. It will market the offering through Wednesday.

Maxar is also in the US leveraged loan market with a $1.5 billion deal that will refinance an existing term loan and notes maturing in 2023. The transaction is one of five in general syndication at the moment.

The market found its footing with the launch of around $8 billion in offerings this week, accompanied by a price index spike and fund flows swinging back to positive, all of which could encourage other offerings to come forward -- including potential mega transactions such as those financing the buyout of Citrix Systems Inc.

As of Friday morning New York time, only one bank meeting has been penciled in for next week. Automated software provider Kofax Inc. will hold a lender call Monday for a roughly $1 billion loan sale supporting its buyout by Clearlake Capital Group LP and TA Associates Management LP.

Investment Grade

In the high-grade market, weekly volume is expected to finish at $29.9 billion, toward the top of the $25 billion to $30 billion range forecasted. Nineteen issuers came to the primary market this week, after just one was able to sell fresh debt the week prior to the Memorial Day holiday.

Next week, sales momentum is expected to continue with a few preliminary projections suggesting about $25 billion. Volume may surprise to the upside if issuers want to get ahead of next week’s consumer price index report, which could shed light on whether inflation has peaked.

Investment-grade returns have improved 1.11% month-to-date as of Thursday and yields started ticking back up this week. Year-to-date returns, however, are still down.

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