• The past 2 sessions only look boring on the surface
• Beneath the surface, bonds have been coping with a huge glut of corporate issuance
• What does it all mean?

If you're anything like me, you shut down mentally every time I reference something like corporate issuance.  Either that, or I've done a decent enough job explaining it in the past that you "get it."  If so, feel free to skip ahead.

Corporate Issuance Refresher

Companies issue debt.  The bigger the company, the bigger the debt they might issue, depending on the sector.  Some of the biggest corporate bonds over the past few years have been from well known firms such as Verizon and Apple.  Other large issuances have come from names many of us have never heard, like AbbVie, which has launched several deals over $10bln (a huge offering, considering we frequently see entire days that don't reach $10bln).

Companies don't just enter their data into some trading terminal and magically make their bonds available for anyone to buy.  Instead, they enlist the help of "Bookrunners"--teams of corporate bond specialists at large financial firms like Goldman, BofA/Merrill, JPM, Barclays, Deutsche Bank, etc.

The bookrunners are so named because they handle the accounting of the deal (i.e. "run the books"), but that doesn't just mean they're helping to structure the deal.  The bookrunners are also running the "order book" around town (figuratively), trying to get investors onboard to buy the soon-to-be-issued debt.  Or in cases where there is high demand for the debt, the bookrunners can sit and wait for the phone to ring. 

It should be noted that the corporate bond market is a comparative dinosaur when it comes to electronic trading.  Although the bonds do indeed make it onto electronic platforms eventually, much of the early work is done over the phone with very little transparency relative to other market sectors.  That's one of the reasons you don't hear as much about it and why issuance amounts and levels of demand can sometimes seem like a surprise.

Corporate debt is typically priced based on the corresponding Treasury yield plus a margin that reflects the credit risk of the issuer and the overall level of demand in the market.  The important part here is that a majority of the rate of return of a corporate bond is based on Treasuries.  As such, the bookrunners can hedge against the risk of market movement by selling Treasuries, or making trades that have the equivalent effect (there are many different ways to take a "short position" in Treasuries without simply selling Treasuries, but for all intents and purposes, it's the same thing).

The bottom line is that corporate issuance can create instant selling pressure in Treasuries on top of the fact that corporate bonds can be an alternative investment for bond traders that might otherwise be buying Treasuries and MBS.  The hedging part usually comes out in the wash (i.e. if a bookrunner sold Treasuries to hedge or "lock the rate" during the issuance process, they often buy it back after the fact), but the overall level of supply will hurt Treasuries/MBS to whatever extent the supply is greater than average/expectations.

With all that in mind, yesterday was the biggest day of corporate issuance so far in 2016, with over $20bln being auctioned off.  Today probably won't make it quite that high, but it's also on track to be one of the bigger days this year.  Combine this with the fact that the week's Treasury auction cycle begins today and it's a very tough environment for bond markets.  Viewed in conjunction with the shorter term technicals potentially turning a corner, we may well be concerned that the longer term technicals will roll over as well.

Of course the other way to look at it is that bond markets are absorbing a lot of supply without allowing themselves to be pushed too much weaker in the process.  After all, yesterday was a green day, and we're only off modestly to begin today.  If I had to pick a side, I'd choose to be more impressed with the resilience than I would be scared about the impact of issuance.  To be holding anywhere under 1.84% with these headwinds is a victory, and 10's are currently fighting for support well under the 1.77% pivot.