With Rate Hike Risk On The Radar, Banks Rush To Sell New Bonds
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Issuers of investment-grade corporate bonds have been rushing to market with new sales recently as interest rates climb and rate hike risk nears.
A slew of fresh high grade financial and corporate debt priced this past week, amid an easing of geopolitical jitters in Italy, as well as ahead of the Federal Reserve’s widely expected 25bp rate hike at the conclusion to its Federal Open Market Committee (FOMC) meeting June 13.
To date, a total of roughly US$34bn of fresh investment-grade issuance crossed the tapes in May, almost 37.7% of syndicate managers’ estimates for the month, and more than 132.5% of expectations for the week, according to Ron Quigley, head of fixed income syndicate, at Mischler Financial Group.
Many of the issuers to enter the primary market this past week have hailed from the financials sector, as interest rates – while notching higher – generally continue to remain at ultra-low levels. The long list of names include Citigroup (C), Credit Suisse (CS), Dankse Bank (DNKEY), First Republic Bank (FRC), Goldman Sachs Bank USA (GS), Keybank (KEY), PNC Bank (PNC) and Toronto-Dominion Bank (TD).
The yield on the 10-year U.S. Treasury note was last quoted at around 2.94%, a backup of roughly 7bps since last Tuesday, when uncertainties over Italy’s government and status within the eurozone triggered turmoil in financial markets.
Analysts at Blue Line Futures noted the banking sector has been “on fire” as yields recover from the post-Memorial Day plummet, and a weaker U.S. dollar has “boosted earnings optimism for the multinationals.” They added that “the resiliency this market has displayed through recent and treacherous news has allowed a path of least resistance higher now that things have quieted down.”
Shares of big U.S. banks were on the climb Thursday, with Bank of America (BAC), C, GS, JPMorgan (JPM) and Morgan Stanley (MS) each making intraday gains of between 0.30% to more than 0.90%.
The Financial Select Sector SPDR Fund (XLF) has risen by around 4.1% since the post-holiday rout, and was up about 0.25% on the day Thursday at a little more than US$28.00.
However, lingering trade war rhetoric, along with rising interest rates, have contributed to unsettled nerves in the credit markets. The IG CDX index – a gauge of market sentiment among credit investors – widened by nearly 2.4bps intraday Thursday to roughly 66bps.
In terms of cash bond spreads, senior financials were among the worst performers with 0.6bps of spread widening at an OAS of around 87bps, followed only by the materials sector, which was 1.5bps wider on the day at 132bps.
All cash bonds widened by almost 0.5bps to about 104bps.
Meanwhile, CDS levels of some big U.S. banks generally suggested little change in the market’s perception of the industry’s banking sector, while marginal spread widening remained in place over the past three months.
Recent quotes on 5-year CDS spreads on certain banks:
Firm (Ticker) |
Intraday Thursday |
Level |
Past 3-Months |
BAC |
-0.2 |
57 |
+8 |
C |
+0.15 |
59 |
+7.5 |
GS |
+0.1 |
69 |
+6 |
JPM |
+0.3 |
50.5 |
+3 |
MS |
-0.3 |
65 |
+5.5 |
In April, big U.S. bank stocks had outperformed the XLF on the back of stronger-than-expected quarterly earnings reports. However, investors delving deeper into the numbers generally envisioned a stronger impact from the corporate tax cut and lift in interest rates, and share prices had not seen sustained their stellar performance.
Disclosure: The analysis in this article is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...
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