U.S. primary debt markets will be wide open next week as investors take the news in stride that the Federal Reserve will begin selling its portfolio of corporate bonds purchased through an emergency lending facility during the pandemic.
Investment-grade bond supply is expected to ramp up for the rest of the month, after $20.25 billion sold in the holiday-shortened week. June estimates are centered around $110 billion of fresh supply. In riskier new issues, monster leveraged buyouts are coming back and bringing sizeable deals to the leveraged loan market with them.
Citigroup Inc. strategists say the Fed’s presence will continue to be felt by corporate credit markets, even as it formally exits its small corporate bond holdings.
“The primary and secondary-market credit facilities stand as a blueprint for future shocks,” strategists led by Daniel Sorid wrote. “The Fed thus retains an invisible presence in the corporate bond market that investors value at 30 basis points or so at the index level.”
Risk premiums barely moved after the Fed’s announcement this week with the decision to unwind the program being “another sign of the strength of the corporate bond market, not a signal of a wider view on tapering across asset classes,” according to Barclays Plc strategist Brad Rogoff.