June 2020

The credit markets had another solid month with new issues at the forefront of client activity and spreads closing tighter for the second straight month. 

June brought social distancing, with quarantine coming to an end and an economy that was trying to re-open at the state level but on a very uneven basis. We saw credit spreads snap tighter and the new issue Investment Grade Credit market priced a record for $169.09 billion for June.

Additionally, this month reversed May’s net client selling and we saw $1.156 billion in net client buying. The monetary and fiscal stimulus programs have greatly impacted the credit backdrop and have allowed new supply that has led to record breaking weeks and months for new issues. Investor demand for high-grade bonds has been insatiable since the Fed’s announcement to support the credit markets. The strong demand continues to translate into strong pricing leverage for issuers. After paying 20bps-30bps on average in concessions in March, April and part of May, borrowers have been paying negative concessions to price deals this June, driven by order books that are well oversubscribed.  

Last week, the new issue market continued to gain more interest as the Federal Reserve’s announcement to buy individual corporate bonds has driven borrowers to the primary market. This new issue supply put 2020 volume over 2019’s entire year supply in just six months. The Fed told the biggest U.S. banks they can’t increase dividends or resume buybacks through at least the third quarter, as uncertainty over the course of a global pandemic weighs on lenders.

The industry performed well in annual stress tests, according to a statement on June 25 from the central bank, but a separate review of the effects of the coronavirus on the economy and financial system uncovered potential risks that left the fate of their dividends in question.

The Fed “is taking action to assess bank’s conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months,” said Federal Reserve Vice Chairman for Supervision Randal Quarles. “The banking system remains well capitalized under even the harshest of these downside scenarios.”

In addition, the Fed capped dividends at second-quarter levels and said future payouts would be limited by a formula based on recent earnings. 

Credit Supply Snapshot

IG (ex-SSA)

Total

MTD

$169.091b

YTD

$1176.916b

Run Rate

Run Rate +98%

2020 $1,177.9b

2019 $593.7b

Largest Months by Volume

Date

Volume

May-20

$242.605b

       Apr-20

$285.6b

Mar-20

$259.2b

May-16

$177.7b

Jan-17

$174.0b

June-20

$169.09b

IG Credit spreads were tighter this month by 10-40 basis points following May’s move where they became tighter as well. The spring was a roller coaster for credit as spreads were trading at the YTD tights in mid-February. As the coronavirus started to impact the market, spreads pushed out to the wides in mid-to-late March and went on a full rip tighter in April that had spreads 50 to 100 basis points tighter. May and June’s push tighter has spreads approaching pre-coronavirus levels and June’s move tighter also brought net client buying along with it.

The CDX Investment Grade Index opened June at 78.1 and traded in a fairly tight band trading into 66.2 on June 5 and as wide as 82.2 on June 11, eventually closing the month out at 76.48. The Bloomberg Barclays U.S. Agg Avg OAS closed out June at 1.50, close to the tights of 1.44 on June 8 and June 16, with the high of 1.61 on June 11. See the charts below for more information.

CDX Investment Grade Index

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Bloomberg Barclays U.S. Agg Corporate Avg OAS
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IG credit flows came in this month at $604 billion vs May at $598 billion, vs April at $607 billion, vs March at $599 billion, vs February at $428 billion and January at $457 billion.

Demand for credit in June reversed May’s net client selling and in turn saw net client buying this month, which came in at $1.601 billion. This is back in line with January and February which were both net client buying months, with February at $677 million net buying and January $3.9 billion net buying. The bulk of net client buying in June was in the 0 – 1yr part of the curve $4.155 billion and 1 – 3yr $3.910 billion, with 12 – 30yr seeing net client selling at $696 million, 7 – 12yr $2.306 billion and 3 – 7yr $3.138 billion.  

Financials were the leader in net client buying with $5.075 billion along with utilities, technology and materials. Energy, consumer discretionary, health care, communications, industrials and consumer staples all saw net client selling. See IG Credit Flow chart below for additional information.

June IG Credit Flows

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June IG Credit Maturity Flows

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Investment Grade Credit closed out the month with record new issue flows, tighter spreads, a solid credit backdrop but uncertainty over states re-opening their economies as coronavirus cases spiked in multiple states across the country.

The Federal Reserve’s programs are in full swing and have credit markets approaching pre-coronavirus levels. This month saw more tightening spreads as health concerns remain and have the markets back on high alert with volatility back in the market.  Still, the long-term ramifications of the coronavirus remain a big unknown. We saw businesses re-opening, albeit at an uneven pace. With virus cases on the rise in some states, we are seeing a scaled back reopening on some levels.

June’s monthly new issue volume totaled $169 billion, the sixth largest monthly tally on record and this month was the fourth consecutive month to crack the top six all-time. Since March 17, $920 billion has priced, dwarfing the $320 billion over the same period last year with 2020 supply running 98% ahead of 2019, on pace to comfortably shatter 2017’s $1.3 trillion record.

The Fed was the primary driver of the vast improvement in the credit landscape. Most recently, they commenced the primary market credit facility, in addition to its already functioning secondary market corporate bond buying program which pushed credit tighter.  

In June, AmeriVet Securities was a co-manager on $800 million Ally Financial 3yr deal and a co-manager on a $500 million deal for Deutsche Bank NY 11NC10.  

Continuing tensions, health concerns and the economy are all at the forefront of daily conversations across the U.S. Spreads will take their que from any number of these issues but as the summer months continue to unfold, we anticipate the new issue calendar to slow a bit while the markets will remain volatile.

The one thing we have noticed is a continued positive environment for issuers as we are seeing historically low funding costs and historically low coupon levels; we will find out if that will be enough to keep the new issues flowing during the summer months.