Meanwhile, from the “I’m compelled to mention” files.
Constrained as I am by the finite number of hours in a day and, perhaps more germane, constrained as readers are by humans’ finite capacity to absorb information, some things worth mentioning get left behind during any given week. Years ago it occurred to me that if I can only read, say, a dozen articles in a day, the average person’s quota is likely much lower. That prompted an editorial shift in favor of incorporating incremental information into longer pieces, versus drowning readers with a tsunami of short articles, some of which might be of questionable relevance to the average person absent efforts to weave them into a broader macro narrative.
That said, some stories which might be more interesting if incorporated into a big-picture take simply demand their own, dedicated coverage by virtue of representing a milestone. The post-Labor Day high-grade supply deluge is one such story.
Last week was the busiest in history for the US investment grade primary market, which saw 55 deals placed. Borrowers tapped the market for nearly $78 billion in just four days. That nearly matched the total for August (figure below) and essentially doubled estimates.
By volume, last week ranked fifth all-time, eclipsed only by four weeks in 2020, when companies rushed to market after the Fed kicked the door open and inserted a doorstop in the form of two corporate bond-buying facilities. Last week’s high-grade deals took total IG issuance for 2021 beyond the $1 trillion mark.
“The widely held expectation that issuance would be heavy immediately following the holiday was likely self-reinforcing, as issuers prefer to be in the market at the time when investors have the most dry powder,” BMO’s Daniel Krieter and Daniel Belton said.
It’s not going to abate immediately. I mean, it is, but only relative to last week’s historic blockbuster. Syndicate desks are looking for at least $35 billion in supply over the next five days. As Bloomberg wrote, “banks are pushing companies to pull forward deals that were expected to happen later in the year while the window is still wide open and before rates rise.”
Over the past five years, the week after the post-Labor Day bonanza saw issuance slow by half, consistent with estimates of $35 billion to $40 billion in the new week.
For the month, estimates were at $140 billion. Whether those forecasts need to be recalibrated is an open question.
“It’s tempting to assume that total September supply will significantly exceed projections [but] issuance was always expected to be heavily front-loaded this month given Labor Day falling late in 2021 and the September FOMC meeting on the 22nd,” Krieter and Belton went on to say.
Meanwhile, investment grade funds took in another $2.33 billion last week (figure below).
It was the fifth consecutive week of inflows. Note that from the week of April 8, 2020 (so, just after the Fed announced its backstop for the corporate credit market) until late July 2021, there were just two weeks of outflows from high-grade funds on Lipper’s data.
Obviously, borrowers are keen to lock in low rates now given ambiguity around the Fed. And when it comes to demand, one market participant summed it up pretty succinctly in remarks to Bloomberg for the linked article above. “Us investors are saying ‘Hey, keeping bringing more.'”
The excess savings of the world have to be mopped up — usually by the country with the reserve currency — the United States. The excess savings is not from the factory or service workers of China or Vietnam, Singapore, German, U.S. or “pick your country”. Nearly a majority of the population of each country cannot afford a unexpected $500 bill. The savings is from those that cannot spend as much as they make. Call it the top 5% or the top 1%.
The United States was able to accommodate the hoard of incoming cash during 2000-2007 with the housing bubble. “Give us your money and we will give you paper called mortgages.” Obviously credit-worthiness of the home-owner at the time had no meaning.
Now the U.S. meets the demand with its newly minted junk bonds, SPAC’s, high-priced equities, newly issued stock, and housing (again). Credit worthiness of the issuer has no real meaning as before. The rising flood of cash coming into America requires a huge mop and Wall Street provides it. Is one to throw their money into Chinese junk bonds or Chinese equities? I think not… Treasuries? Not if you want to beat inflation.
Maybe the American worker is no longer a willing participant. Now the worker may be saying, “Hey if you want me to work, give me some of the excess saving from the rich of the world by paying me a higher wage.” Maybe. It will be interesting if this is what breaks the system of low worker pay and high return to the owners of capital as has been in place since the 1970’s.
A young friend of mine was contacted by Chase (the bank) and offered a job. My young friend throw back a number that was 50% higher salary than his current wage — and put him firmly into a 6-figure category. Chase answered “Yes — when can you start?” He responded, “Give me a couple of weeks to think about it.” Since the job required pressed pants, collared shirts, and on some days, a tie, he had to contemplate whether the change is worth it as compared to working in boxer shorts and wearing a t-shirt of his favorite band while working at home. The world is changing — but probably not fast enough.
H-Man, the current corporate bond market is like the Afghanistan evacuation, everyone rushing to make sure they don’t miss that last plane.