U.S. Top-Rated Bond Supply to Fade Ahead of Labor Day Weekend

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Investment-grade bond supply is expected to all but dry up next week ahead of the U.S. Labor Day weekend. 

Dealers are calling for $0 to $5 billion of new high-grade sales, with the possibility of two to three issuers coming forward. Those deals could also be pushed until after Labor Day.

Traders are assessing how the latest comments from Federal Reserve Chair Jerome Powell at the Fed’s annual Jackson Hole symposium will impact credit markets. Powell said the central bank could begin reducing its monthly bond purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter.

The initial credit reaction was positive after Powell’s cautious approach to rate hikes. The spread on the investment-grade credit default swaps index, a measure of credit risk, fell to its tightest level in almost two months Friday.

“Everything that Powell said is good for credit,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “We’ve got easy monetary policy, a growing economy and good corporate cash flows. Even if credit is priced for perfection, there’s nothing to reverse it.”

Spreads on corporate debt have been trending wider since early July as investors assessed new risks, including the rapidly spreading delta variant. With investors now less concerned about a sooner-than-expected rate hike, that trend could reverse.

“People were cautious on rates and risk assets going into Jackson Hole, moving underweight and putting hedges on. But Powell is really making it clear that there’s a separation between tapering and rate hikes, so with rate hikes off the table, it’s giving people confidence to buy corporate credit again,” Academy Securities Inc.’s Head of Macro Strategy Peter Tchir said.

The recent lack of high-grade supply is also causing spreads to tighten, and they’ll like rally even more, Tchir added. 

Supply may continue to lag. Dealers expect around $130 billion of investment-grade supply in September, which is about 15% less than the monthly average over the last five years. 

High Yield

The summer lull is also impacting high-yield issuance, with the primary market for junk bonds at a virtual standstill. Supply should pick up after Labor Day, with the pipeline expected to be jammed with buyout financings

No U.S. leveraged loan meetings are set heading into the week, and two small leveraged loan deals have commitments due on Sept. 1. 

In distressed credit, GTT Communications Inc. and Sequential Brands Group Inc. both have forbearance agreements set to expire Tuesday.

China Huarong Asset Management Co. will release its long-overdue 2020 results, as well as its earnings for the first half of 2021 on Sunday. The bad-debt manager has strayed far beyond its original mandate into a myriad of risky ventures, creating turmoil in Asian credit markets that eased after the firm secured a government-backed bailout. 

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