US high-grade bond market braces for September surge

By Hillary Flynn

NEW YORK, Sept 1 (IFR) - The US high-grade bond market is gearing up for one of its busiest Septembers ever, with bankers expecting up to US$130bn in new issuance once primary activity re-starts next week.

Even (Taiwan OTC: 6436.TWO - news) after the largest August on record, conditions have rarely been better for issuers as spreads grind tighter amid a surge of demand from global investors desperate for yield.

"There has been a lot of supply, but the market feels great," one syndicate banker told IFR. "The stars are aligned."

Average high-grade spreads tightened 34bp year-to-date to 139bp as of August 31, according to data from Bank of America (Swiss: BAC.SW - news) Merrill Lynch.

Although that is still far off the post-financial crisis low of 106bp hit in June 2014, the low funding costs have helped draw borrowers into the market at a rapid clip.

Last month saw a whopping US$115.3bn of supply - a record for August and even more than what priced last year in September, which is typically a big month for issuance.

Meanwhile pressure has been building to get ahead of any potential rate hike in the US or election-related volatility as the country prepares to vote for a new president in November.

Federal Reserve Chair Janet Yellen's hawkish speech in Jackson Hole last week and hints by other Fed officials about a looming hike have put borrowers on alert.

"People have already started to pull deals forward ahead of a potential rate hike," said a second syndicate banker.

NOT WAITING

Syndicate desk estimates for September range from US$100bn to US$130bn, which at the upper end would be the second-largest September on record.

While a busy August meant that many borrowers have satisfied their immediate needs, bankers say refinancings and opportunistic taps will likely drive volumes going forward.

Several large M&A deals are also still in the works, which could potentially push volumes closer to the busiest-ever September of 2013, when issuance reached US$143.903bn.

Many of these are healthcare deals such as the Abbott Laboratories US$25bn acquisition of St Jude Medical, insurer Anthem Inc (NYSE: ANTM - news) 's US$54bn purchase of Cigna Corp (Frankfurt: 866918 - news) and drugmaker Shire (Xetra: S7E.DE - news) 's US$32bn buy of Baxalta International.

And while several of these deals face challenges, bankers are holding out hope that they will eventually see the light of day.

"Between the Shire-Baxalta (Berlin: 9BX.BE - news) deal and Abbott Labs buying St Jude's, that's US$4bn in new debt right there," a second syndicate banker said.

With (Other OTC: WWTH - news) the asset class continuing to enjoy healthy inflows, participants think the market should easily digest the new supply with little if any impact on new issue concessions, which, according to IFR data, averaged about 2.43bp in August.

Investment-grade funds absorbed another US$1.924bn of cash in the week ended August 24, bringing year-to-date inflows to US$29.874bn, according to Lipper data.

That stands in stark contrast to the US$1.825bn in net inflow seen for all of 2015.

"There is definitely enough appetite out there to absorb the expected supply," an investor said. "Average concessions will remain kind of thin unless you get some type of injected volatility."

Still the market will be closely monitoring economic data for any signs that would justify hiking rates sooner rather than later, particularly Friday's nonfarm payrolls number.

Economists surveyed by Reuters forecast that 180,000 were probably added in August.

But a strong number of above 200,000 will likely add further impetus to front-load deals before the Fed's September 20-21 meeting. (Reporting by Hillary Flynn; Editing by Paul Kilby and Marc Carnegie)