CreditSights: The Week In Credit
After the summer hiatus, activity in the corporate bond market kicked back into gear last week. Although primary market volumes for the week fell short of blockbuster levels, it is likely that the month is just making a slow start out of the gate and that the coming weeks will see supply build to the heavy pipeline that has been rumored. It certainly will not take much for volumes to exceed August levels. Issuance volumes literally fell off the proverbial cliff during August to a degree that indicates forces other than the typical summer lull were at work. The investment-grade complex only managed $11.6 billion worth of deals which is not only a monthly low for the year-to-date but equates to volumes typically only seen at those times when the primary market falls into a shock-induced state of catatonia. August volumes are typically light but historically equate to nearly 7% of annual investment-grade issuance totals. However, if the CreditSights forecast for 2003 annual issuance is correct ($430 billion) then this year the month will have contributed just 2.3% of volume. The situation is not much improved when speculative volumes are taken into consideration either. The $8 billion of high-yield deals seen during August was also a volume low point in the 2003 calendar.
The extent to which issuance dried up justifies a slightly raised brow, but in the wake of the extreme interest rate volatility and the rise in yields that began in mid-June, it can be explained away. Why September's calendar will be of such interest is that it will indicate whether August's volumes are an aberration, a month of fatigue in a year of otherwise strong issuance, or whether the turning of the interest rate cycle also marks the turning of the tide in terms of high levels of corporate bond issuance. Corporations are flush with cash and during the extended downtrend in interest rates they have had many opportunities to come to the bond market to pre-fund near-term maturities. This creates the possibility that the response to the back-up in yields will be a sharp drop in issuance volumes. However, to the extent that the bond rally came to such an abrupt end, there could well be those who will still be keen to issue bonds. Yields may seem high relative to two months ago, but given where we are in the interest rate cycle chances are they will go higher still. Hence we are not reducing our annual volume forecast in the investment-grade sector from $430 billion, though we would expect high-yield volumes to remain subdued for the remainder of the year relative to a strong first half. We have seen $30 billion of high-yield issuance year-to-date and $115 billion of investment-grade issuance.