Abdullah Karatash

Corporate bond new issue fatigue appears to have set in among players with several recent new issue deals blowing up in secondary trading.

There was a very large real-money account that actually pulled out of a deal yesterday as the issuer / dealer pushed to take the bond issue spread much tighter (higher bond price) than the initial price guidance.

With treasuries where they are, this makes sense. The uncertainty over Greece is not helping either.

As a player put it succinctly, this could be a summer of fear and waiting.

Taking a step back and looking at the broader picture over the past few months, it appears that we may be in the midst of a massive bubble; not so much a technology bubble as the pundits would have one believe but a corporate debt bubble.

With interest rates as low as they are, corporations are rushing to issue as much debt as possible; already year-to-date debt issuance levels far exceed the level of debt issued in the entirety of last year.

It feels frothy, circa 2005.

Even companies that do not need the cash are issuing debt to lock in record-low interest rates and hoard "free-money."

Others are simply buying back their own stock with the proceeds of the debt issues.

If Treasury bond prices continue to rally, as they very well could, the demand from real-money investors (West coast and insurance players) for new corporate bond issues will dry up.

Ironically, any "bond vigilantism" may (unintentionally) come from the corporate bond markets, as opposed to the market for government debt.

In today's corporate bond new issues, issuers and dealers alike were pushed to make concessions on the bonds by some of the larger real-money investors.

Flows overall remain light and spreads closed generically tighter in line with higher stocks, but corporate cash bonds continue to trade heavy, particularly in off-the-run bonds with some of the savvier dealers paring down their inventories.

Liquidity in USD assets will start drying up tomorrow ahead of Memorial Day weekend (it's a big holiday in the U.S.).

Oil closed above $101 a barrel while commodities such as Cocoa, Sugar, and Wheat closed higher across the board; Gold was notably unchanged.

Market Color will resume in June.