Will the upcoming Treasury auctions stop delusional primary corporate bond market?
Senior Fixed Income Strategist
Summary: The 10 and 30-year Treasury auctions today and tomorrow will prove the primary corporate bond market right or wrong.
During the day of Tuesday, we have seen $20bn of US corporates pricing in the market. Borrowers are expected to price more than $50bn in bonds by the end of the week. Order books where sizable and investment-grade and high-yield spreads remained stable. It means that the market is hungry, but not overly optimistic to pay more than the market price for these assets.
Among various deals that got priced, I found it unusual to see a 10-year bond from Bank of China Aviation. Initial price talk (IPT) was in the area of +240bps over the benchmark US Treasury. By the end of the day, the borrower placed $750mil bonds at +197.5 over Treasuries, a much tighter spread than expected. The order book was more than $2.2bn. We are talking about a Chinese state-owned aircraft leasing company. One might think that China and airplanes in the same sentence may provoke shivers, however, it doesn’t seem to bother investors.
Today and tomorrow the 10 and 30-year Treasury auctions will prove these investors right or wrong. If the market signals that inflation is on the rise, pushing Treasury yields up, the primary corporate market may end its honeymoon early.