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Investors still hooked on US corporate bonds

NEW YORK, Sept 16 (IFR) - There are still no visible signs of fatigue in the US high-grade corporate bond market as volumes for the year surged past US$1trn in a week struck by a nasty bout of volatility.

After a cautious start, the primary market swung back into action with almost US$40bn in 54 bond tranches sold this week by names like biotech company Gilead Sciences, tech giant Cisco Systems and Deutsche Telekom.

Investors piled into deals, ensuring solid oversubscriptions and tight spreads in most cases and showcasing the resilience and strength of the red-hot high-grade bond market.

The biggest boost to confidence came on Tuesday when 12 issuers sold over US$23bn of bonds, making it the fourth busiest day of the year by volumes. The rush came as the Dow Jones Industrial Average dropped nearly 200 points and rate volatility.

"Tuesday was a fascinating day. There was a lousy macro backdrop, but credit was absolutely fine even with the Treasury sell-off," said one head of syndicate at a Wall Street firm.

"Issuers got the size they wanted at the levels they were told, and the 12 deals broke the back of the expected supply for the week," said the banker.

In just the last two weeks, corporate issuers have raised a whopping US$93bn through high-grade bonds after a record August month with over US$115bn in supply - but still there is no indication the torrid pace will relent.

Drugmaker Shire is lining up a US$10-$12bn deal for next week - and will likely try to get it over the line before the Bank of Japan and US Federal Reserve rate announcements on Wednesday.

New issue concessions have not been out of whack with the norm, and most bonds were holding up in secondary - giving the buyside even more reason to keep putting cash to work.

Lipper data showed a US$568.62m inflow of cash into the asset class for the week ended Sept 14.

TIME FOR A RESET?

The possibility of a rate rise from the US Federal Reserve - one of several things that unnerved stock investors this week - could be a good thing for the credit markets by signaling the economy is strong, some said.

A repeat of the taper tantrum in 2013 is also a small risk.

"That was caused by a sea change in what the Fed was thinking," said Tim Doubek, a senior portfolio manager at Columbia Threadneedle.

"You would have to see a big uptick in global growth or inflation for rates to rise more sharply and for people to leave fixed income."

The market has been making small adjustments to price after a strong rally and perceived risks ahead of the US election, but it still has a way to go.

Average spreads on investment-grade bonds have widened by about 5bp from year lows of T+138bp at the end of August - but they are well under the year's wides of 221bp in February, according to Bank of America Merrill Lynch data.

Gary Herbert, head of global credit at Brandywine Global said a Donald Trump presidential win could cause sovereign spreads across developed markets to back up by 50bp-100bp - and have a knock-on effect on high-yield and emerging markets.

"It is still a low probability, but so was Brexit," Herbert told IFR.

JITTERY JUNK

High-yield bonds have come under a bit more pressure - but spreads are still very low and attractive for issuers.

Average US junk bonds spreads have widened by 27bp from a September 8 low of 499bp, BAML data shows - but are 360bp below the year's wides in February.

The new issue machine has slowed, but that's mainly because the high-yield asset class is more correlated to stocks.

"When you walk in and (equity) futures are down triple digits, it is very hard to advise a company to sprint out into that," said one senior leveraged finance banker.

Investors did push back on some trades.

A more leveraged issue for wound care and regenerative medicine company Acelity - a US$1.75bn five-year non-call two bond issued through the Kinetic Concepts subsidiary and rated Caa1/B- - priced at 9.625% versus the original mid-9% target.

And among three energy deals that priced, a Triple C rated US$300m five-year non-call two issue for Great Western Petroleum priced 50bp wide of price talk at a final yield of 9.252%.

Other issuers also had to price bonds slightly wide to their curves to help generate demand and support after market trading.

The banker pointed to Double B rated healthcare services provider IMS Health, which offered a 5% yield on its new US$1.05bn 10-year non-call five issue but would have likely priced with a 4% handle before the volatility struck, he said.

The notes jumped two points in secondary.

Portfolio managers said they still want paper even after US$2.45bn of outflows from US junk funds in the week ended September 14, according to Lipper.

"The calendar will get absorbed," said Darren Hughes, a portfolio manager at Invesco.

"It is just a question of pricing." (Reporting by Natalie Harrison and Davide Scigliuzzo; Editing by Shankar Ramakrishnan and Sudip Roy)

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