Morning Commentary: Potential rate hike eyed; December sees steady high-grade outflows

By Cristal Cody

Tupelo, Miss., Dec. 18 – The investment-grade bond market stayed quiet over the morning on Tuesday as the Federal Reserve kicked off its two-day monetary policy meeting.

Market sources are eyeing a rate hike announcement following the end of the Federal Open Market Committee monetary policy meeting on Wednesday.

Little issuance is expected by syndicate sources for the rest of the week, but a few deals could still price with up to $2 billion of high-grade supply forecasted.

No reported issuers came to the primary market on Monday.

Trading volume was light on Monday with $16.66 billion of investment-grade issues traded, compared to $18.98 billion of secondary market volume in the same period a week ago, according to Trace.

The three-month Libor yield was up 1 basis point to 2.8% early Tuesday, a source said.

Meanwhile, final fund flows data for November revealed a second consecutive monthly outflow, while December so far has seen almost daily outflows, Yunyi Zhang, a BofA Merrill Lynch analyst, said in a note released on Tuesday.

November had $6.1 billion of total outflows from U.S.-domiciled high-grade funds and ETFs, following a $23 billion outflow in October.

“Looking at the components, short-term high grade actually experienced the largest monthly inflow ever of $10.8 [billion] in November, up from the $5.9 [billion] inflow in October,” Zhang said.

High grade excluding short-term funds “continued to suffer from meaningful outflows” of $16.9 billion in November, down from the $28.9 billion outflow in October, she said.

“With the recent weakness in the market, we're seeing daily outflows from U.S. high grade funds and ETFs for the most part in December month to date with the exception of one $982 [million] inflow last Thursday,” Zhang said.

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