Mar 21, 2023
High-Grade Borrowers Storm Debt Market Ahead of Fed Rate Decision
(Bloomberg) -- Companies piled into the US investment-grade bond market Tuesday ahead of the Federal Reserve’s next interest rate decision, after the market was shuttered for a week as banking turmoil swept the US and Europe.
Nine borrowers, mostly utilities, raised fresh debt following a six-day rout that came to an end on Monday. Among the names were insurance provider MetLife Inc., which sold a $1 billion 10-year note that yields 1.58 percentage point over Treasuries, after initial price talks of 1.85 percentage point, according to a person familiar with the matter.
Republic Services Inc., which provides disposal services in the US, sold $1.2 billion of notes in two parts, a separate person said. The longest portion of that debt, an 11-year note, yields 1.45 percentage point over Treasuries compared to 1.85 percentage point initially, said the person.
The slew of deals came after utility companies Duke Energy Ohio Inc. and CenterPoint Energy Houston Electric LLC wrapped debt offerings Monday after six days of no sales amid the collapse of three US banks and tumult at Swiss lender Credit Suisse Group AG.
“New issuers have been hesitant to enter the market,” said Ellis Phifer, a managing director for fixed income capital markets at Raymond James, adding that “with damaged confidence come problems to enter.”
Companies are now bringing fresh financings after the market reopening and before the Fed can raise rates any higher on Wednesday. They are taking advantage of the short window of opportunity between those two events and companies’ respective self-imposed earnings blackout periods, according to Stephen Philipson, head of commercial products at U.S. Bank.
“Whenever the market goes through cycles like this, typically we need a solid defensive sector to reopen the market and that was welcomed with Duke and Centerpoint,” Philipson said in an interview. “There’s a good backlog that will see more defensive names come in [today] and Thursday in a somewhat limited window between the meeting and earnings blackouts.”
Companies with higher investment-grade ratings are anticipated to make up the bulk of issuance in the coming weeks, said Philipson. Utilities, normally a more “defensive” sector, will also be active in the market, he predicted.
Funding costs have fallen in the last few weeks, with Treasury and investment-grade yields dropping from highs seen earlier in the month. Investment-grade spreads came off a peak last week, the highest since October, and currently stand at 157 basis points. Meanwhile, a key measure of credit risk, the investment-grade CDX, is nearly six basis points tighter, adding to an optimistic backdrop for issuance.
Ultimately, the Fed’s call will be the deciding factor for how primary activity will play out, said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, in an interview.
“Obviously, the market thinks a 25 basis point raise is now more likely,” he said. “Then the question will be, what’s the trajectory after that and what is the language? Is it still fixated on inflation or does it bring in the idea of some financial stability?”
Some Wall Street banks expect a rate cut and others anticipate the Fed to hold steady, while futures pricing reflected an 82% chance of a 25 basis-point hike. “They have to take a balanced approach tomorrow,” Phifer said, referring to the Fed officials.
Representatives for MetLife and Republic Services didn’t immediately respond to a request for comment.
--With assistance from Michael Gambale and Nina Trentmann.
(Updates to show deals have priced)
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