September high-grade bond issuance volume finishes on target; lower October supply eyed

By Cristal Cody

Tupelo, Miss., Sept. 29 – Investment-grade bond issuance slowed in a hurry once volatility ramped up and Treasury yields climbed to over 4.5%, but deal volume came in strong at the start of the week.

“It was quiet today, but they issued a lot of debt this week,” a source said.

Deal volume totaled around $19 billion this week, in line with market forecasts for about $15 billion to $20 billion of new investment-grade bond issuance.

September supply finished at more than $125 billion, also in line with volume forecasts for the month, after a soft August saw fewer than $70 billion of high-grade bonds print.

October is expected to open with some activity that will be front-loaded ahead of the upcoming long Columbus Day holiday weekend.

Quieter may be the word for the month with market sources expecting lower-than-normal issuance for an October.

BofA Securities Inc. analysts are projecting about $80 billion to $90 billion of new supply in October. The forecast comes at the low end of the median range of issuance over the past five years, excluding 2020, of $83 billion to $128 billion, according to the report.

“October IG issuance volumes should be more modest for two reasons,” the analysts said. “First, the big jump in interest rates generally discourages opportunistic issuance. We saw an example of that in September, when supply underwhelmed during the week of Sept. 18 following the September FOMC meeting. Second, issuance in October is more skewed towards financials, as U.S. industrials tend to be in issuance blackouts related to the 3Q earnings reporting season.”

While the big six U.S. banks come out of blackout reporting periods by mid-October, that may not translate to bond volume, according to the report.

“So far in 2023, however, financial supply in general, and the big six U.S. bank supply in particular, has been the lowest in three years,” the BofA analysts said. “This should be negative for October issuance volumes should the trend continue.”

Overall market tone has been colored by rising defaults and growing concern judging by the Fear Factor index this week, sources reported.

The CBOE Volatility index jumped 12.07% to 18.94 on Tuesday in its highest close since May 25 before pulling back slightly by the week’s end.

The 10-year Treasury yield has jumped more than 40 basis points over the month.

A potential U.S. government shutdown in October also remains a weight on markets with Congressional budget approval at an impasse.

A drawn-out period of high rates will challenge weaker-rated corporates, according to a S&P Global Ratings note on Thursday.

“For investment-grade entities, we think ratings can better absorb higher borrowing costs,” S&P said. “We expect credit deterioration ahead will be contained in most sectors, though real estate could see more downgrades.”

Outflows resume in ETFs

Elsewhere, corporate investment-grade funds ended this week with heavy outflows, according to Refinitiv Lipper US Fund Flows.

Outflows totaled $1.66 billion for the period ended Wednesday.

Corporate funds had a $2.06 billion inflow in the prior week.

Outflows also soared in U.S. high-grade bond funds and ETFs, according to a BofA note.

Funds and ETFs saw their biggest outflow so far this year with $3.7 billion of outflows for the week ended Wednesday after a $630 million inflow last week and an $1.68 billion inflow in the prior week.

Flows turned negative in ETFs, with $2.31 billion of outflows following a $1.64 billion inflow the previous week and a $2.21 billion inflow the week prior, BofA said.

Outflows to high-grade funds also increased this week to $1.39 billion after a $1.10 billion outflow a week earlier.

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