High-grade bond supply falls short for week, month; October new deal pipeline light

By Cristal Cody

Tupelo, Miss., Sept. 30 – New investment-grade bond issuance volume finished well short of market expectations for the week and the entire month of September.

Friday capped off a week of little supply as issuers stayed to the sidelines mulling the market, while one junk issuer entirely withdrew an offering of senior secured notes and a first-lien term loan due to the volatility.

Over the week, three investment-grade corporate issuers priced $1.7 billion of notes, while the sovereign, supranational and agency space saw $1 billion of notes in two transactions print.

High-grade desks were looking for up to about $15 billion of volume for the week.

The month was ending with only about $80 billion of new issuance.

About $150 billion of corporate high-grade deals were anticipated by market participants for the month after August ended with more than $110 billion of supply.

Numerous deals that did print in September came with coupons in the 5%-plus range.

Investment-grade bond spreads are near their wides of the year, while outflows from high-grade bond funds also climbed this week and are expected to remain elevated in October, BofA said in a report on Thursday.

“The spread on ICE BofA US IG corporate index jumped 16 bps wider since Friday on the back of a big spike in interest rates and rates and equity implied volatility,” BofA said.

KBRA chief strategist Van Hesser said in a report on Friday that high-grade spreads at 155 bps are close to their 20-year average of 150 bps, while junk spreads at 526 bps are near their 20-year average of 509 bps but “nowhere near the 800 bps we would typically see at this point in a credit cycle.”

Meanwhile, “reducing new issue supply is helping, and there is a strong bid for higher quality credit from yield-bogey buyers like insurance companies and pension funds,” Hesser said. “Still, we believe the gravitational pull for spreads is wider, judging that the mix of aggressively tightening financial conditions into an economy headed toward recession is not something investors will endure at long-term average spread levels.”

Supply is expected to stay light in October with continued volatility and earnings reports in focus, according to market sources.

Only about $75 billion of investment-grade corporate bond volume is expected to print over the month.

About $10 billion to $15 billion of issuance is anticipated for the week ahead – depending on the day’s events, sources note.

Funds, ETF outflows jump

Investment-grade corporate investment funds posted heavy outflows of $10.3 billion for the past week ended Wednesday, up from outflows of $4.97 billion a week earlier, according to Refinitiv Lipper US Fund Flows.

High-grade outflows from funds and ETFs also soared to $8.19 billion this past week ended Wednesday from $4.54 billion in the prior week, BofA said.

The outflow was similar to an $8.91 billion peak in June, but still well off the $40 billion-plus weekly outflows at the peak of Covid in 2020, according to the note.

Outflows from funds also jumped to $6.58 billion this week from $3.23 billion a week ago.

High-grade ETF outflows increased moderately to $1.61 billion this week from $1.31 billion in the prior week.

Short-term high-grade outflows rose to $1.51 billion from $1.18 billion a week ago, while excluding short-term outflows climbed to $6.68 billion from $3.36 billion in the prior week.

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