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Issuers swarm US corporate bond market despite Trump uncertainty

NEW YORK - Big deals from AT&T and Microsoft this week helped push January's high-grade bond volumes to historic levels.

Tuesday's deals took US dollar issuance in January to US$176.43bn, just US$1bn shy of the tally in May 2016, the biggest month ever for the asset class.

Financial sector issuers provided a glut of supply halfway through the month, with US banks pricing large deals after reporting earnings.

But corporate sector issuers such as Microsoft, AT&T and Broadcom have priced even larger, double-figure transactions.

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After Microsoft's US$17bn deal on Monday - the largest of the year so far - AT&T launched a US$10bn six-part deal on Tuesday, to repay debt and for general corporate purposes.

Investors said longer-dated bonds in AT&T's deal did not tighten much throughout bookbuild because of the company's expected merger with Time Warner.

"It's difficult to get too bullish about AT&T because the market is anticipating a much larger deal later in the year and that will likely be skewed to the long end," said one investor.

"But this deal is attractive compared to where AT&T has traded. We thought the long end was particularly attractive."

The Time Warner deal appeared to have hit the ropes last year amid concerns around its impact on competition.

But investors expressed renewed confidence around the transaction on Tuesday, after AT&T's CFO said he was "confident" it would be approved after meeting with Trump last week.

SURPRISING PACE

The pace of issuance so far this year has taken many by surprise.

"The expectation this year was that supply would contract from a year ago," said Jason Shoup, senior portfolio manager at Legal & General Investment Management America.

"But there was always a little bit of a worry that what supply we got would be front-loaded, and we are absolutely seeing that now."

Bankers said uncertainty around President Donald Trump's administration was clearly not stopping companies from hitting the markets to raise new debt.

"We've just seen the second busiest month on record despite the back-up in Treasury yields and one of the most controversial US Presidents we've ever had," said one credit strategist.

"That in itself shows this has not been a deterrent for issuers to sell debt."

February issuance is also now expected to remain robust, though not quite as strong. Issuance in February over the last three years has averaged US$99.35bn, according to IFR data.

Corporates are likely coming now to the primary market ahead of any volatility due to reforms implemented in the US by the new administration, and with elections due in several European countries including France and Germany.

In the US, issuers are particularly mindful about tax reform which is still unclear, but is mainly focused on a possible border adjustment tax, the elimination of deductibility of interest on debt, a proposed reduction in the corporate tax rate and a repatriation tax holiday.

But those measures, some say, is unlikely to come into legislation until later this year, or possibly even next.

"That means that there is still a big incentive for companies like Microsoft to sell debt to finance buybacks and shareholder returns right now even if some of these proposals will be a disincentive to issue debt in the future," said the credit strategist.

One analyst said he would not be surprised if even Apple, which has significant cash overseas, would look at issuing debt after reporting results on Tuesday.

(Reporting by Will Caiger-Smith; editing by Shankar Ramakrishnan)

 
 
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