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The market feasted on another big week of investment grade bond issuance, but perhaps it’s still a few servings short of inducing the kind of spread widening indigestion that investors are seeking.

Borrowers priced another $40bn this week bringing September supply to around $105bn through two weeks (excluding a benchmark deal from TD Bank that was announced this morning).

While that’s a ton of supply in one of the busiest months of the year, it’s behind last year’s record-setting pace of $119bn through the first two weeks of the month, according to 9fin data.

Investors were hoping that a flood of supply might move spreads off of their record tight levels. But liquidity remains strong and bankers following the pipeline said there’s not an overwhelming amount of supply coming.

“We understand why the buyside would like to see indigestion so they get some pricing power on their side, but from our seats we certainly don't see it happening,” one banker said. “Absent some sort of macro geopolitical shock, from what we can see of the visible pipeline, it’s unlikely that supply upends the current trends.”

Strong technicals continue to keep spreads tight, namely the lack of net new supply with much of this month’s supply going toward refinancings.

A $2bn three-part deal from Home Depot was the largest M&A supply on the week to fund the retailer’s $5.5bn acquisition of building materials company GMS. The acquisition may delay Home Depot’s deleveraging goals by about six months, as we detailed this week, but market participants said the deal is practically a “rounding error” for an issuer of its size and strength.

The other large corporate borrowers were all funding debt repayment.

Uber’s $2bn two-part deal will be used to repay convertible notes and two SUNs due 2027 and 2028 that were issued back when the ride hailing app still had B3/CCC+ ratings. The new five- and 10-year bonds priced with coupons of 4.15% and 4.8%, respectively, which is a 200bps-300bps savings over its previous notes.

Hewlett Packard Enterprise also came to market this week with a $2bn four-part bond package in connection to its $14bn acquisition of AI networking company Juniper. The deal closed in July but HP Enterprise prefunded that deal with a $9bn bond deal last year and was back in the market this week to refinance some of the lingering Juniper debt.

With so little net new supply and strong inflows to the asset class from yield buyers, books are consistently multiple times over subscribed with deals tightening by 25bps-30bps regularly and offering very little new issue concession, one portfolio manager said.

“All year we've been in this very low net supply situation after maturities,” the PM said. “We will need more substantial supply to get some indigestion, and we may not get that until next year when we expect M&A debt financing to sort of pick up.”

Additionally, some are already preparing for a possible downgrade of Ford which would eliminate even more debt from the IG index. We detailed how investors are positioning for a Ford fallen angel here.

Subordinated refinancing

It’s not just the corporate issuers. Banks are moving swiftly to clear upcoming maturities.

In particular, banks that issued subordinated paper in the 2020-2021 time frame are coming up on their five-year call dates and are taking this opportunity of tight spreads to refinance those maturities.

Toronto Dominion Bank is out today with a 60NC5 additional tier one financing that will be used to refinance some of its existing AT1 debt. Likewise, Simmons First National issued a $325m subordinated 6.25% 10-year note and Huntington priced a $750m 6.25% perpetual note.

This subordinated bank debt space is a bright spot in what is otherwise expected to be a sector with declining funding needs. Senior issuance is slowing because regulatory holdings are easing under the Trump administration, but sub debt remains attractive.

“We had a negative net supply in the bank sector recently, which is the first time in a while, but what you are seeing, is more perps, hybrids, and tier ones,” the portfolio manager said. “Some banks are calling preferreds because the newer structure is more attractive on an after tax basis, so the bank sector will continue to be the biggest issuer in the market, but if anything supply will be flat to down going forward.”

Investors are also watching for more consolidation in the banking space, especially as it relates to integrating new artificial intelligence technology into the process.

There have been several in recent months. This week PNC Financial Services announced a deal to buy Colorado-based FirstBank in a $26.8bn deal; last month Fifth Third Bank announced an acquisition of cash management software company DTS Connex; in July Huntington Bancshares announced a $1.8bn acquisition of Texas-based community bank Veritex; and earlier this summer Pinnacle Financial Partners set out to acquire Synovus Financial in a $7.9bn deal.

That could lead to more supply down the line, but again, the market will likely have to wait before that supply makes it to the primary.

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