New Issuance From Banking Sector Floods Corporate Bond Market

Fixed-income markets were largely unaffected by the looming government shutdown, as investors have become inured to the prospect of as well as the actual shutdowns over the years. While it was a holiday-shortened week, the new issue market was open for business, and following recent earnings reports, the banking sector flooded the market with new issues. Many of the large global banks reported earnings at the end of the prior week or early this past week and wasted no time issuing bonds after their quiet periods ended. While many financial companies reported lower-than-expected earnings or in some cases losses, underlying performance was generally within expectations, with their bottom lines constrained by one-time tax expense charges in conjunction with the recently enacted Tax Cuts and Jobs Act. The charges were attributed to a combination of writing down the value of deferred tax assets accumulated during the financial crisis of 2008-09 as well as repatriating accumulated earnings of non-U.S. subsidiaries. The who's who in the banking sector that took advantage of the opening to the new issue market included Bank of America (BAC) (BBB+, stable), Citigroup (C) (A-, stable), Goldman Sachs (GS) (BBB+, stable), JPMorgan Chase (JPM) (A, stable), Morgan Stanley (MS) (BBB+, stable), PNC Financial Services (PNC) (A- stable), U.S. Bancorp (USB) (AA-, stable), and Wells Fargo (WFC) (A, stable).

Credit spreads in the investment-grade market remained relatively steady as strong demand for corporate bonds was able to mostly absorb the deluge of new issuance. The average spread of the Morningstar Corporate Bond Index (our proxy for the investment-grade bond market) widened just 1 basis point and ended the week at +93, near its lowest levels since before the global financial credit crisis. As for the underlying components of the index, the average spread of the financial sector widened 1 basis point, whereas the average spread of the industrial sector was unchanged and the utility sector widened 1 basis point. Year to date, the average credit spread of the overall index has tightened 3 basis points, driven by a 4-basis-point tightening in the industrial sector and 7-basis-point tightening in the utility sector. Financial sector credit spreads have been flat.