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HG monthly: Issuance runs 59% ahead of 2019 pace as rates slide

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HG monthly: Issuance runs 59% ahead of 2019 pace as rates slide

Low interest rates in November drew more swarms of high-grade issuers to a primary marketplace that is already directed more than $1.65 trillion of gross issuance to investors this year, according to LCD. Volume has sprinted 59% ahead of the 2019 issuance pace through November, and the year's total is already more than $400 billion in excess of the previous annual high amount, recorded in 2017.

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Issuance for the month reached $87.1 billion, up from $71.7 billion in October, when excluding sovereign, quasi-sovereign, supranational, agency, and hybrid debt/equity offerings from the count, LCD data show.

Despite the sequential pop from October, the fourth-quarter 2020 pace does indicate a receding tide following the massive wave of issuance that followed on the Federal Reserve's March rollouts of liquidity backstops for the high-grade and fallen-angel issuer universe. The November total is the third-lowest monthly tally since March, ahead of only the totals in October and July, both of which historically are seasonally slower periods, when many prospective issuers are sidelined ahead of the release of their quarterly earnings results. Last month's total is also the slimmest for a November period since 2016.

While volume may be tapering — after issuers pulled forward many of their 2021 borrowing needs to this year — the lure of low rates continues to attract a steady stream of opportunistic prints. New-issue yields in November, on average, tumbled to a new pandemic-era low of 1.80%, down from 2.21% in October. The November level also moved below the prior nadir at 1.97% in August this year, when scores of issuers locked in their lowest-ever coupon rates across the yield curve.

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The low yield average in November reflected, in part, a relative shift in the maturity mix, favoring shorter-tenor offerings. Last month, maturities for roughly 45% of new-issue tranches were in the five-year maturity bucket or shorter, versus 28% in August. Deals dated 10 years or longer accounted for 47% of the November tranches, down from 64% in August.

Even so, the 1.78% yield average for the broad S&P U.S. Investment Grade Corporate Bond Index at Nov. 30 marked a new pandemic-era low, down from 1.97% at the end of October and just under the prior low at 1.79% on Aug. 6.

On the last day of November, Bank of New York Mellon Corp. completed an upsized $750 million offering of 0.35% three-year notes at T+20, or 0.386%. The prior low print for the three-year maturity bucket was PACCAR Financial Corp.'s pricing of 0.35% three-year notes on Aug. 4 at a slightly higher 0.394% reoffer yield and wider T+28 initial spread.

Bank of New York Mellon's spread level at pricing drew within a few basis points of the tightest-ever spreads for new three-year notes, all recorded in 2013 and 2014, across deals for Exxon Mobil Corp. (T+15), Walmart Inc. (T+17), Johnson & Johnson (T+18) and Apple Inc. (T+18).

The Bank of New York Mellon deal also brought into sharp relief the dramatic decline in absolute costs since the early weeks of the year. The tightest spread for a three-year placement previously this year was a T+22 level for 2023 notes placed by Adobe Inc. in January, at a relatively lofty 1.7% coupon rate.

Also, spread levels are broadly tighter since August. The T+152.5 average for new-issue BBB prints in November compared with T+179.6 in August, according to LCD. At the broad index level, the S&P investment-grade index closed out November at a year-to-date low of T+103, a low since Feb. 25 and well through the index's T+127 level at the end of August.

Refinancing remains the biggest driver of issuance in 2020 against sliding rates. The sum of issuance proceeds explicitly earmarked primarily for refinancing efforts reached $685 billion for the year through November, or nearly 75% ahead of the comparable 2019 total.

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Notably, M&A was a key driver of last month's total amid risk-on market sentiment. The $25.4 billion of M&A-driven issuance in November (including jumbo deals for Bristol-Myers Squibb Co. and Verizon Communications Inc.) was the most for that use-of-proceeds carve-out since a $34.8 billion total in November 2019. Even with the November influx, however, M&A-driven issuance volume through November was down more than 23% year over year.

Article amended at 3:25 p.m. on Dec. 16 to correct the yield on the Bank of New York Mellon Corp. notes to 0.386%.