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US high-grade starts 2017 with third-largest week ever
January 6, 2017 / 4:20 PM / a year ago

US high-grade starts 2017 with third-largest week ever

NEW YORK, Jan 6 (IFR) - The new year started with a bang in the US investment-grade bond market, which clocked its third-busiest week ever this week with almost US$55bn in issuance.

In a supply frenzy expected to last all month, borrowers raced to sell new debt ahead of any volatility caused by more rate hikes and the incoming Donald Trump presidency.

The list of issuers was full of familiar names, but the size of the deals and the sheer depth of investor demand caught even seasoned bankers off guard.

More than US$44bn was raised on just Tuesday and Wednesday, the hottest start to a new year at least since the financial crisis.

“The pace we started the year with took us all by surprise,” said Simon Mayes, head of US FIG syndicate at BNP Paribas.

“The issuers we’re seeing aren’t surprising - it’s more the size of the deals and how well they have done.”

Yankee bank bonds dominated the first two business days of 2017, with Barclays, Lloyds, Credit Suisse and National Australia Bank providing some of the largest deals.

Barclays took advantage of the Bank of England’s approval of callable bonds for new loss absorbing debt regulations to sell a US$5bn deal that attracted a whopping US$13.65bn of orders.

BNP Paribas, Credit Agricole and Societe Generale meanwhile jumped into the new non-preferred senior asset class that was enshrined in French law late last year.

BNPP’s US$1.75bn deal was in particularly high demand, being three times subscribed with an order book of US$5.3bn.

SNEAKING IN

While most US banks are expected to hit the market after reporting earnings in mid-January, Citigroup sneaked in with a US$5.25bn deal on Wednesday.

The trade, which attracted US$9.6bn of orders, included an 11-year non-call 10 tranche with a new fixed-to-floating coupon structure that banks said eased the cost of the call option.

“Once you strip out the interest-rate risk, the value of the option is less meaningful,” said a banker away from the deal.

Other large US banks are expected to sell similar structures in the coming weeks as they strive to meet total loss absorbing capacity requirements by January 2019.

The Fed confirmed the proposed rules in December, approving callable structures as well as imposing a hard deadline rather than the planned phase-in of the rules over several years.

“Now they don’t have the phase-in on the deadline for TLAC, that could make their issuance a little more urgent,” said Beth Schroeder, a senior analyst at investment firm Loomis Sayles.

The week’s menu of deals also included several large corporates, including the finance arms of Ford and Toyota, Warren Buffett’s Berkshire Hathaway and John Deere.

IN BEFORE TRUMP

The rush has come amid expectations that 2017 could be volatile given more potential rate hikes and uncertainty about the impact of any new policies once Donald Trump takes office.

“The community realizes there is the potential for a lot of macro and geopolitical event-risk later this year, which could lead markets to struggle and not be as accommodative,” said one credit strategist.

It is also driven by a need to take advantage of a market set up to absorb large amounts of flow at the start of year.

Money is coming in from around the world, thanks to a mindset among investors to focus on quality paper that comes with a yield pick-up - themes that look to continue from 2016.

Lipper reported a net inflow of more than US$2.18bn into investment-grade funds for the week ended January 4. For full year 2016, the net inflow topped US$46.9bn.

High-grade bond spreads have now tightened by 10bp since the US election in November and 92bp since their most recent peak last February, according to Bank of America Merrill Lynch.

And despite all the volume this week, almost every piece of that paper has been trading tighter than new issue levels, giving investors more incentive to continue their buying spree.

This in turn should encourage more high-grade bond issuers to come now rather than wait, said market participants.

“There could be trouble on the horizon given how much good news is priced in at these levels - the more likely move is 25bp wider than 25bp tighter,” said Edward Arden, head of FIG at TD Securities.

“But you dance while the music is playing, so right now everyone is dancing.” (Reporting by Will Caiger-Smith; Editing by Shankar Ramakrishnan, Marc Carnegie and Matthew Davies)

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