The US credit market gave a tempered reaction on Wednesday to Donald Trump’s election victory, with many bankers even saying they expected new bond issuance to resume as soon as Thursday.
In keeping with the relatively flat response of equities in early Wednesday trade, the bond markets were taking a calm view of the prospects of a Trump administration.
“For every bit of uncertainty, there is a ray of optimism,” one Wall Street bank credit strategist told IFR. “We are still in a favorable environment for corporate issuers (of debt).”
Before the markets were open, the CDX IG27 index – which measures derivatives hedging against credit risk in investment-grade debt – was about 3bp wider at 78.75bp. The comparable index for junk bonds was off 0.6 points to 103.
But both were only modestly weaker by mid-morning.
As for Treasuries, the underlying basis for the corporate bond market, longer-term notes saw spreads widening while short-term two-year Treasuries narrowed slightly.
That curve steepening was similar to the market response after the UK voted to quit the European Union in June, another occasion when most pollsters seemed to badly misread the popular mood.
Eyes on Rates
Many analysts underlined that, even as the 10-year Treasury yield gapped out to nearly 2%, the cost of raising new debt remains very low in historic terms.
In addition, Trump’s win may have lessened the chances that the Federal Reserve will hike interest rates next month – an additional restraint on the cost of borrowing money.
“I suspect we’ll see the chance of a December rate increase decline today,” said Nicholas Colas, chief market strategist at brokerage Convergex.
“The Federal Reserve may well decide we don’t want to raise rates in such an uncertain environment.”
While some said the uncertainty on rates was likely to keep bond issuance in check for the moment, others said they expected deals to be in the market as soon as Thursday.
“It is not a complete bloodbath from a fixed income or debt capital markets perspective,” said one senior Wall Street banker.
“Investors are saying that they are ready to buy, and issuers are saying they are ready to go.”
US investment-grade bond issuance year-to-date is running slightly ahead of 2015 – the fifth consecutive year of record issuance volumes – and 2016 could still be year number six.
“It’s early to say, but we could see … a surprise to the upside for (issuance in) November,” the senior banker said.
One head of investment-grade syndicate told IFR: “Client dialog will be bespoke, but I think we will see deals (Thursday).”
Deals being marketed in the structured finance market since late last week were finding interest early on Wednesday, said another banker.
Early Winners
While no president is ever able to fully implement a full menu of campaign promises,Trump’s pledges on health care and infrastructure looked likely to boost some sectors early on.
The credit strategist pointed to the steel and pharmaceutical sectors as probable winners.
Bonds of junk-rated coal miners rallied in early trading on expectations that Trump will fulfill his pledge to revive the sector and scale back regulation.
Peabody Energy’s 6% 2018s jumped by over seven points to a cash price of 58 in early trading on Wednesday, before sliding back to 55, according to MarketAxess data.
Murray Energy’s 11.25% 2021s traded as high as 80.5, or up 4.75 points on the day, before retracing to 78.25.
Potential changes in tax repatriation rules could also mean that tech companies will have less need to borrow in the bond market to finance share buybacks and M&A.
Apple bonds were tighter by 5bp-7bp across the curve, while Microsoft bonds were 5bp-10bp tighter, with the biggest moves at the long end.
Meanwhile banks were expected to get a bounce thanks to Trump’s vow to eliminate the Dodd-Frank Act – something Moody’s warned about on Wednesday morning.
“While a reduction in regulatory compliance costs would bolster bank earnings, reduced oversight and a roll-back of requirements would also result in a weakening of banks’ capital and liquidity positions, a negative from a credit perspective,” the ratings agency said. (Reporting by the IFR team; Additional reporting by Reuters News; Writing by Marc Carnegie; Editing by Shankar Ramakrishnan and Jack Doran)