High-grade primary slows; bank supply builds for post-earnings week; M&A volume drops

By Cristal Cody

Tupelo, Miss., April 12 – Some investment-grade bond issuers stood down this week as the surprise increase in March inflation data shook markets midweek, sources reported.

Supply ended up coming on the low side of forecasts at $20 billion and was mostly front-loaded over the first two sessions.

About $20 billion to $25 billion of bond volume was forecast for the week.

Treasury yields shot up with the benchmark 10-year note climbing 19 basis points on Wednesday after the inflation report but retreated Friday after a miss in earnings from JPMorgan Chase & Co. and Wells Fargo & Co.

The 10-year Treasury yield closed the day down 7 bps to 4.49%.

Citigroup Inc. beat earnings estimates as the three banks kicked off the first-quarter earnings season on Friday.

The remainder of the top U.S. banks will report earnings results next week, including Goldman Sachs & Co. on Monday and Bank of America Corp. and Morgan Stanley on Tuesday.

Deal volume is expected to ramp up in the April 15 week with the focus on bank issuance, sources reported.

About $25 billion to $30 billion of new high-grade corporate paper, and potentially more, is anticipated to print.

The Labor Department’s report on Wednesday that the March Consumer Price Index rose a seasonally adjusted 0.4%, higher than a 0.3% increase analysts forecast, pushed back expectations late in the week of a potential Federal Reserve rate cut, sources reported.

BNP Paribas Securities Corp. analysts now expect two potential cuts in July and December instead of three cuts.

M&A supply slows

Elsewhere, high-grade bond supply from the mergers-and-acquisition space slowed in March and the first quarter.

March saw just $9.4 billion of investment-grade issuance related to the M&A space, down significantly from $54.9 billion in February, according to a BofA Securities note.

North American M&A announcements dropped to $122 billion in March from $202 billion in February, while the pipeline of announced deals with potential investment-grade bond funding needs decreased to $398 billion in March from $418 billion in February, BofA said.

M&A activity over the first quarter also was light, according to a Wall Street Horizon note.

“There were only 88 M&A announcements in Q1, just slightly edging out Q3 2023 which had 87, but otherwise the lowest tally since Q2 2020,” according to the report. “IPO activity was even worse, with only 51 announcements, the lowest in over 5 years.”

The latest M&A transaction announced and expected to impact the high-grade primary market is Johnson & Johnson’s $13.1 billion acquisition of Shockwave Medical, Inc. reported a week ago, a source said.

The company reported it expects to fund the deal with cash and debt and close the transaction by mid-year.

ETF inflows up

Weekly inflows in short-intermediate corporate investment-grade debt funds/ETFs declined over the period ended Wednesday to $3.2 billion from $4.26 billion in the prior week, according to Refinitiv Lipper U.S. Fund Flows.

Year to date, net inflows total more than $32 billion.

Inflows into high-grade bond funds and ETFs focused on high-grade corporates, agencies, mortgages and Treasuries also declined, to $4.2 billion from $5.46 billion, over the same weekly period, according to a BofA Securities note.

ETF inflows ramped up to $4.12 billion during the week from just a $610 million inflow a week ago, while high-grade funds inflows slowed to $8 million from $4.85 billion in the prior week.

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