CreditSights: Issuance Levels Split
On an aggregate basis, April's issuance volumes were the lowest of any month so far this year as the sell off in the Treasury market kept the pipeline subdued. Total fixed rate issuance came in at $36.6 billion and less than $20 billion of this was investment grade rated. Year-to-date investment-grade volume is less than $122.5 billion, a 30% drop on volume issued for the equivalent period in 2003.
The opposite effect is in play in the high yield sector. $17 billion worth of speculative grade deals in the past month brought the year-to-date total in this market to $70 billion, which is nearly double the $36 billion that was issued in the first four months of 2003. It was widely expected that 2004 volumes would fall short of last year's totals for a number of reasons but the continued resilience of high-yield issuance, particularly in the wake of the sector's poor performance in the first three months of the year, is somewhat surprising. One dynamic worth noting however, is the contrasting behaviors of the supranational and sovereign issuers in the high-grade and high-yield markets. Investment-grade, supra/sovereign issuance is running at half of 2003's pace, with issuance in the first four months of this year just $18 billion compared to $38 billion for the same period last year. In the high-yield sector however, issuance from the speculative grade emerging market countries has been strong and the 2004 year-to-date total of $10.4 billion is a 34% increase over 2003.
The low level of issuance volume in the corporate sector is being exacerbated by a robust redemption schedule. According to Merrill Lynch indices, redemptions and coupon payments for the U.S. Corporate Master Index were approximately $19.2 billion in April, meaning that net issuance was minimal. And looking forward the profile of cash spun off by the index remains strong for the next few months. May coupon and redemption payments should exceed $20 billion and June and July's totals are close to $25 billion.
We have never taken weak issuance volume as a good indicator of the "health" of the corporate market. Without the momentum behind a robust primary pipeline, turnover becomes concentrated in a small number of names, and lessened liquidity makes effecting portfolio shifts in the secondary market even more difficult. However, the corporate sector has exhibited better risk appetite in April than it did earlier in the year in the first wave of the Treasury market sell off and the tight technicals being fostered by low supply levels should be supportive of spreads going forward.
MarketAxess also recorded quieter conditions in the secondary market, with estimated TRACE disseminated volume down 8% to $162 billion versus $177 billion in March. The trade count registered a 5% decrease with 205,000 trades reported. The number of unique issues traded was more stable at 3,072 and the number of unique issuers traded actually increased to 453 from 442 in March. The auto names dominated the sector turnover yet again with Ford, the most active issuer, claiming a full 8.6% of total turnover and several spots in the list of bonds with the greatest spread tightening during the month on the back of its strong first quarter earnings report. The top 10 issuers accounted for 35.6% of reported turnover and the top 20 captured 52.6%.
