The shockingly low jobs print Friday has quashed talk of an imminent Fed rates hike, meaning the green light is on for another surge of bond issuance, bankers say. The bond market looks to be one of the beneficiaries of what was an otherwise disappointing number, with the US economy adding just a paltry 38,000 jobs in May. That was well off the consensus estimate of 164,000. But it means the Federal Reserve likely cannot consider a rates hike soon, so the cost of raising debt will remain ultra-low.
"This is a disappointing jobs number no matter how you slice it, but it pushes back the Fed, which is a reason for the markets to rally," one credit strategist said. Traders now see a 38% chance of a Fed rate hike in July, down from 59% prior to the jobs report. "Everyone has been talking about Brexit, rate increases and the US election, but the siren is now all about the economy," said one debt capital markets banker.
Spreads on the investment-grade CDX IG 26 were 1bp wider at 78.15bp after the jobs announcement, but the yield on the 10-year Treasury fell to 1.71%. "This is positive for issuers, that's for sure," said a Wall Street bond syndicate banker. "I think people that might have delayed or wouldn't have come next week because of the Fed will move their deals forward."
On the heels of the biggest month of bond issuance ever in May, at more than US $177bn, June has already seen more than US $19bn in investment-grade bonds priced. "Investors don't show any signs of pulling back," the syndicate banker said. "Just another reason to move deals forward." Even with a holiday Monday and issuance quiet on payrolls Friday, the high-grade primary logged a hefty US $35.9bn in new issuance this week, bolstered by a US $13bn deal from Aetna.
Other bulky trades included a US $6.5bn deal from Mylan, a US $5bn deal from Pfizer, a US $4bn trade from J.P. Morgan and a US $3bn issue from Citigroup. Investor demand was strong, with Aetna amassing a US $44.6bn order book and Mylan seeing just over US $22bn in demand. The DCM banker said issuance next week would likely be between US $20bn and US $25bn.
Several trades are already in the works, with National Grid and Australia and New Zealand Bank both out on roadshows. "This is why you have seen record issuance," said the DCM banker. "Markets are healthy, investors are buying paper and issuers are pulling forward deals."