By Will Caiger-Smith
NEW YORK, Jan 6 (IFR) - The new year started with a bang inthe US investment-grade bond market, which clocked itsthird-busiest week ever this week with almost US$55bn inissuance.
In a supply frenzy expected to last all month, borrowersraced to sell new debt ahead of any volatility caused by morerate hikes and the incoming Donald Trump presidency.
The list of issuers was full of familiar names, but the sizeof the deals and the sheer depth of investor demand caught evenseasoned bankers off guard.
More than US$44bn was raised on just Tuesday and Wednesday,the hottest start to a new year at least since the financialcrisis.
"The pace we started the year with took us all by surprise,"said Simon Mayes, head of US FIG syndicate at BNP Paribas.
"The issuers we're seeing aren't surprising - it's more thesize of the deals and how well they have done."
Yankee bank bonds dominated the first two business days of2017, with Barclays, Lloyds, Credit Suisse and NationalAustralia Bank providing some of the largest deals.
Barclays took advantage of the Bank of England's approval ofcallable bonds for new loss absorbing debt regulations to sell aUS$5bn deal that attracted a whopping US$13.65bn of orders.
BNP Paribas, Credit Agricole and Societe Generale meanwhilejumped into the new non-preferred senior asset class that wasenshrined in French law late last year.
BNPP's US$1.75bn deal was in particularly high demand, beingthree times subscribed with an order book of US$5.3bn.
SNEAKING IN
While most US banks are expected to hit the market afterreporting earnings in mid-January, Citigroup sneaked in with aUS$5.25bn deal on Wednesday.
The trade, which attracted US$9.6bn of orders, included an11-year non-call 10 tranche with a new fixed-to-floating couponstructure that banks said eased the cost of the call option.
"Once you strip out the interest-rate risk, the value of theoption is less meaningful," said a banker away from the deal.
Other large US banks are expected to sell similar structuresin the coming weeks as they strive to meet total loss absorbingcapacity requirements by January 2019.
The Fed confirmed the proposed rules in December, approvingcallable structures as well as imposing a hard deadline ratherthan the planned phase-in of the rules over several years.
"Now they don't have the phase-in on the deadline for TLAC,that could make their issuance a little more urgent," said BethSchroeder, a senior analyst at investment firm Loomis Sayles.
The week's menu of deals also included several largecorporates, including the finance arms of Ford and Toyota,Warren Buffett's Berkshire Hathaway and John Deere.
IN BEFORE TRUMP
The rush has come amid expectations that 2017 could bevolatile given more potential rate hikes and uncertainty aboutthe impact of any new policies once Donald Trump takes office.
"The community realizes there is the potential for a lot ofmacro and geopolitical event-risk later this year, which couldlead markets to struggle and not be as accommodative," said onecredit strategist.
It is also driven by a need to take advantage of a marketset up to absorb large amounts of flow at the start of year.
Money is coming in from around the world, thanks to amindset among investors to focus on quality paper that comeswith a yield pick-up - themes that look to continue from 2016.
Lipper reported a net inflow of more than US$2.18bn intoinvestment-grade funds for the week ended January 4. For fullyear 2016, the net inflow topped US$46.9bn.
High-grade bond spreads have now tightened by 10bp since theUS election in November and 92bp since their most recent peaklast February, according to Bank of America Merrill Lynch.
And despite all the volume this week, almost every piece ofthat paper has been trading tighter than new issue levels,giving investors more incentive to continue their buying spree.
This in turn should encourage more high-grade bond issuersto come now rather than wait, said market participants.
"There could be trouble on the horizon given how much goodnews is priced in at these levels - the more likely move is 25bpwider than 25bp tighter," said Edward Arden, head of FIG at TDSecurities.
"But you dance while the music is playing, so right noweveryone is dancing." (Reporting by Will Caiger-Smith; Editing by ShankarRamakrishnan, Marc Carnegie and Matthew Davies)
Barclays (BARC)
Lloyds (LLOY)