High-grade floaters return, reception lukewarm; steady supply forecast after record February

By Cristal Cody

Tupelo, Miss., March 3 – The investment-grade bond market saw two more matching floating- and fixed-rate tranches priced over the week as the paper remains sparse so far in 2023.

John Deere Capital Corp. sold $2 billion of notes (A2/A/A+) in four tranches on Monday, including three-year fixed- and floating-rate bonds.

The $300 million tranche of floaters due March 3, 2026 priced at SOFR plus 57 basis points, while the $550 million of 5.05% fixed-rate notes due March 3, 2026 priced at a spread of 55 bps over Treasuries, 15 bps tighter than talk. The floaters were talked to print at SOFR plus an equivalent spread to the fixed-rate tranche.

The floaters “attracted a final order book of $357 million for a $300 million size, or only 1.25-times oversubscribed,” a source said.

The issue was quoted better on Friday in the secondary market at 100.20 bid, or SOFR plus 50 bps bid.

On Wednesday, Sumitomo Mitsui Trust Bank priced three-year fixed- and floating-rate tranches as part of a $2 billion three-part offering of notes (A1/A-). The bank sold $500 million of floaters due March 9, 2026 at SOFR plus 112 bps with talk equivalent to the fixed-rate notes. The $1 billion fixed-rate tranche of 5.65% notes due 2026 priced at a Treasuries plus 110 bps spread. Talk was initially at the Treasuries plus 140 bps area before tightening to the 135 bps area.

The primary market has seen two other deals so far this year with matching fixed- and floating-rate tranches.

On Feb. 15, Mitsubishi UFJ Financial Group, Inc. priced three-year fixed- and floating-rate notes as part of a $5 billion five-part offering of senior callable paper (A1/A-).

The deal included $600 million of floaters due Feb. 20, 2026 sold at par to yield SOFR plus 94 bps and $1.65 billion of 5.719% notes due 2026 at a Treasuries plus 108 bps spread, tighter than talk at the 130 bps over Treasuries area. The floaters were talked to print at SOFR plus a spread equivalent to the fixed-rate notes.

The floating-rate portion had a final order book of $1.1 billion, making it 1.83-times oversubscribed, according to a market source.

MUFG’s floating-rate notes due 2026 were trading Friday at SOFR plus 90 bps bid, 85 bps offered, the source said.

The year’s first deal with matching floaters was seen back on Jan. 9 when Royal Bank of Canada priced $3.75 billion of senior notes (A/AA-) in four parts, including a floating-rate tranche.

Royal Bank of Canada sold $300 million of floaters due Jan. 12, 2026 at par to yield SOFR plus 108 bps.

The $1 billion fixed-rate tranche of 4.875% notes due 2026 priced at Treasuries plus 95 bps after talk in the 115 bps area. The floaters were talked to print at SOFR plus a spread equivalent to the fixed-rate notes.

“Not explosive deals to say the least,” a source said of the recent floating-rate portions brought to the market. “They got done.”

Floating-rate tranches disappeared over the back half of 2022 as rates soared and volatility grew and have remained scarce so far in 2023.

The backdrop in the financial markets is not exactly the greatest for a resurgence in the paper with inflation expected to climb further, and the Federal Reserve projected to continue increasing rates through September, according to market sources.

“Future FRN activity is predicated on issuers’ funding needs,” a source said. “Not sure we see a slew of them.”

Active March volume

High-grade corporate deal volume soared over the week to more than $48 billion, beating market forecasts of about $30 billion to $35 billion of supply.

February ended with $154 billion of new investment-grade issuance, the highest on record for the calendar month and likely fueled in part by issuers trying to get ahead of rising Fed risks, according to a BofA Securities Inc. research note.

March high-grade corporate bond supply is expected to total about $150 billion to $170 billion, the lowest since 2019, BofA said.

Looking to the week ahead, about $30 billion to $40 billion of new investment-grade corporate paper is anticipated to price, market sources said.

While financial supply is expected to thin going forward, “corporates should continue to see steady supply against the backdrop of an open primary market with corporates addressing Q1 refinancing needs and robust M&A issuance continuing,” BNP Paribas Securities Corp. analysts said in a note on Friday. “Financials supply has surprised to the downside following the heavy issuance window that traditionally happens after earnings.”

High-grade outflows

Corporate investment-grade funds saw outflows of $238 million for the past week ended Wednesday, which followed inflows of $184 million in the previous week and inflows of $1.19 billion in the week prior, according to Refinitiv Lipper US Fund Flows.

U.S. high-grade funds and ETFs posted inflows of $3.58 billion for the past week ended Wednesday, up from $3.17 billion of inflows in the previous week and $1.25 billion in the prior week, according to a BofA Securities Inc. research note released Friday.

High-grade funds inflows rose to $1.05 billion from $900 million in the previous week, while ETF inflows increased to $2.53 billion this week from $2.27 billion in the prior week, BofA said.

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