Credit markets eye Fed decision with $25 billion in sales

(Bloomberg) – Investors will be eagerly awaiting the Federal Reserve’s interest rate decision next week.

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Markets were already pricing in a 50 basis point rise on Wednesday, with the Fed expected to take a faster approach in order to stamp out stubborn inflation. Accelerating US labor costs and a flexible consumer are effectively giving the central bank the green light to raise interest rates by half a point next week to reduce price pressures.

What the Fed does next week will affect the markets, which are currently pricing in an almost equal chance that Fed policy makers in June will raise the benchmark interest rate by 75 basis points. The Fed has not made a 75 basis point increase since 1994, at the end of the trajectory from 3% to 6%.

Starting in May

Estimates of an investment grade issuance next week are around $25 billion, and some offices are forecasting $125 billion to $150 billion in the historically busy month. Last May, just over $136 billion was released compared to an estimate of $150 billion. Meanwhile, April is set to close with sales of $107.2 billion.

Blue chips sold just $8.6 billion this week, well below consensus estimates of requiring as much as $25 billion. This was the second largest loss this year, according to data compiled by Bloomberg, after the week of January 24, when only $2.6 billion in new debt was raised, well below expectations from $15 billion to $20 billion.

The general volatility in the market suppressed the higher quality releases throughout the week in the primary market as most companies chose to step down to take another look at a later time. Dealers said most if not all borrowers who opted to stay on the sidelines this week will gauge whether debt sales go ahead on Monday and Tuesday.

Data compiled by Bloomberg showed that rising inflation, geopolitical risks and market volatility caused by tightening US monetary policy have all helped reduce the junk bond supply to its lowest level in more than a decade, with bond sales to date reaching just $54 billion.

US junk bond yields are up 265 basis points so far this year as of Thursday, and have increased steadily for four consecutive months to a nearly two-year high of 6.86%. The index is set to close in April with the worst losses since March 2020.

Medical device company Bioventus Inc’s offering of $415 million in five-year junk bonds will remain on the agenda next week. The selling price of the banknote, the first of its kind, was originally expected to start on Thursday. It’s the only junk bond market offering as of Friday.

In the US leveraged loan market, primary market sales have been declining recently. While there are no banking meetings for new issues on the agenda for next week, at least eight bids are expected to be approved in the joint offering. This includes the sale of $2.5 billion in debt from eye care company Bausch + Lomb Corp. , which is raising money to help fund it from Bausch Health Cos.

The slowdown in issuance has allowed the market to recover, Chris Bonner, head of leveraged capital markets at Goldman Sachs Inc., said at the Bloomberg Leveraged Loans Online Conference on Wednesday. Cash balances have grown and investors are likely to back mega deals to support mergers and acquisitions, including those supporting Elon Musk’s acquisition of Twitter Inc. and buy Citrix Systems Inc.

In troubled hours, Endo International reports its quarterly earnings. The company is conducting a strategic review and is exploring “a broad range of potential actions as part of our contingency planning” to address thousands of opioid-related lawsuits, including bankruptcy; Local settlements and opioid settlements could total $1 billion to $2 billion, according to Bloomberg Intelligence.

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