Frontloaded Credit Supply Expected Before Fed Meeting

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Fresh supply in the U.S. investment-grade market is expected to be front-loaded next week ahead of the Federal Open Market Committee meeting Wednesday. Traders will be watching for any clues on when the Federal Reserve may begin tapering talk.

Syndicate desks are calling for $25 billion to $30 billion of issuance, a slowdown from the $35.95 billion that priced this week.

The strong primary market sales come as investors continue to see a positive backdrop for credit.

A Treasury market rally this week that saw the 10-year yield hit its lowest in three months provided a serious boost to the year-to-date returns for credit markets. Total returns on the Bloomberg Barclays U.S. Corporate Bond Index are now down just 1.76% in 2021, after being -5.5% in mid-March.

“Credit investors have got a nice little extra boost from the rally we’ve seen in Treasury prices,” Drew Mogavero, co-head of U.S. credit trading at Barclays Plc, said Friday. “It allows them to focus on fundamentals, the good earnings picture we just had, and most importantly, the very low default rate environment.”

Barclays strategists see strong demand for high-grade credit moving forward. The recent increase in pension funded ratios “should bode well for demand” as they look to lock in gains, and “foreign demand should be strong” as hedging costs remain cheap, strategists led by Bradley Rogoff wrote Friday.

A measure of credit risk, the high-grade CDX, eased Friday to its tightest level since February 2020.

High Yield

At least one junk-bond deal is in the pipeline heading into the week. Air purification equipment producer Madison IAQ LLC will hold an investor call Monday for a $1.5 billion bond sale to fund its acquisition of Nortek Air and retire some of its current debt.

Bank of America Corp. now expects to see the first-ever $500 billion year of junk bond issuance, with issuers eyeing spreads and yields both near year-to-date lows, strategists led by Oleg Melentyev wrote Friday.

In leveraged loans, at least three meetings are set for next week, including for JD Power’s $440 million term loans to finance an acquisition and refinance existing debt. Commitments are due June 18 for the sizable $2.25 billion term loans financing Culligan International Co.’s buyout by BDT Capital.

Investors yanked $642.3 million from U.S. high-yield bond funds in the week ended June 9, the sixth straight week of withdrawals. They added $3.23 billion to investment-grade funds.

Within distressed debt, Washington Prime Group Inc. has forbearance expiring June 14, and GTT Communications Inc.’s forebearance agreement ends June 17.

©2021 Bloomberg L.P.

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