Wall Street expects bond issuance from blue-chip firms to be light -- or even non-existent -- next week, as borrowing costs surge and recession fears mount.

Syndicate desks lack confidence in the near-term deal calendar after the US investment-grade market pitched the first full-week (non-seasonal) primary supply shutout since the onset of the pandemic. Supply projections vary widely, from zero deals to as much as $40 billion, with most desks leaning toward the $10 billion to $15 billion range, writes Bloomberg’s Brian Smith.

US markets will be closed on Monday in observance of the Juneteenth holiday and supply for the rest of the week will be tone dependent, as it has been for much of this year. The uncertainty has made it harder to predict the timing of Oracle Corp.’s mega bond deal of as much as $20 billion to help fund its acquisition of Cerner Corp.

Deutsche Bank AG expects markets to continue to be laser-focused on central banks next week. Federal Reserve Chair Jerome Powell will likely be grilled on what a more aggressive Fed could mean for jobs and the economy when he appears before lawmakers in the Senate on Wednesday and the House on Thursday. The central bank on Wednesday raised interest rates by 75 basis points in the largest increase since 1994 and signaled more aggressive moves to come as it fights the hottest inflation in four decades.

The market will be looking for cues on whether a move of a similar magnitude will be delivered next month, according to DB’s analysts Galina Pozdnyakova and Jim Reid. Funds that buy high-grade bonds have now seen 12 straight weeks of cash withdrawals, making for the longest streak of outflows on record as rate hikes reignite recession fears.

“Central banks will continue to be in the limelight after this week’s hawkish shift across multiple institutions,” the analysts wrote. “The impact on growth is increasingly key for markets.”

Under Pressure

The US high-yield and leveraged loan markets also remain under pressure. Secondary loan prices hit the lowest levels since November 2020 this week. Meanwhile, spreads on US junk-rated corporate bonds, an important gauge of risk that signals higher defaults when it increases, surpassed 500 basis points for the first time since November 2020.

Banks continue to tease discounted prices in the mid-90-cents-on-the-dollar range to draw buyers to new leveraged-loan sales as concerns over inflation and a recession send investors fleeing from risky debt.

Junk deals are also coming at very steep discounts. A group of banks led by Morgan Stanley sold an $895 million junk bond to help fund Entegris Inc.’s acquisition of CMC Materials Inc. at a discounted price of 90.8 cents on the dollar, one of the steepest discounts on a new issue this year.

There are three deals due next week in junk primary, a market that’s more or less confined to deals funding M&A and buyouts as banks look to chip away at the commitments they’ve provided, or for vital refinancing needs.

“There is a lot more room to go from a negative standpoint,” said John Gregory, head of leveraged syndicate at Wells Fargo & Co. “The volatility is going to be really ramped up here for the next few months.”

The rout in the junk credit markets, meanwhile, is creating a buying opportunity in credit derivative indexes and junk bonds, according to Bank of America Corp. strategists. “The rebound is going to be violent and unforgiving,” Bank of America’s Oleg Melentyev and Eric Yu wrote.

Source:
courtesy of BLOOMBERG

by David Caleb Mutua

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