Bonds in Longest Rally Since March, Swaps Dive: Credit Markets
By Pierre Paulden and Sapna Maheshwari
July 14 (Bloomberg) -- Debt investors are signaling renewed confidence in the global economy, snapping up new securities from companies at the fastest pace since March and driving corporate bonds to their longest rally in four months.
Relative yields on the more than 8,500 bonds in Bank of America Merrill Lynch’s Global Broad Market Corporate Index fell for the fourth straight day, the longest stretch since the six days ended March 11. Increased demand allowed retailer Target Corp. to raise $1 billion in its first bond sale in more than two years, while Dutch chipmaker NXP BV, whose credit ratings are at the lowest end of the junk spectrum, increased its debt offering to $1 billion from $600 million.
Optimism that the economic recovery won’t be derailed by Europe’s fiscal crisis rose after Greece was able to sell bills yesterday at interest rates less than the European Union and International Monetary Fund offered in a bailout package. Speculation earnings will exceed analyst forecasts is bolstering confidence in the ability of borrowers to meet debt payments.
“Sentiment has turned,” said Ashish Shah, co-head of global credit investment in New York at AllianceBernstein LP, where he helps manage $199 billion in fixed-income assets. “There is optimism over increased stability in Europe, uncertainty over financial regulation is ending and investors are now hoping for a repeat of 2009 with the European stress tests.”
Mortgages, Swaps
Yields on Fannie Mae and Freddie Mac mortgage bonds that guide U.S. home-loan rates are approaching record lows relative to Treasuries in another sign sentiment is improving. The cost of protecting corporate bonds from default in the U.S. declined to the lowest in six weeks.
The extra yield investors demand to own company bonds instead of government debt fell 2 basis points to 189 basis points yesterday, the narrowest spread since May 24, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 3.96 percent.
Companies are taking advantage of renewed appetite for debt after investors avoided it for most of May and June amid concern Europe’s sovereign-debt crisis would disrupt the worldwide economic recovery.
“We don’t see a lot of corporations needing money, but if you can raise some capital today at a low cost and use that to refinance some other debt you have outstanding it’s a great opportunity,” said Greg Tornga, head of investment-grade strategy at Los Angeles-based Payden & Rygel, which has more than $50 billion in assets under management.
Bond Sales Soar
Worldwide corporate bond issuance rose to $73.3 billion this month from $57.5 billion in the same period of June, according to data compiled by Bloomberg. That’s the most since $148.8 billion was sold in the corresponding period of March.
Target, the second-largest U.S. discount retailer, may use proceeds from its offering of 10-year notes to repay debt, build and remodel stores, finance share repurchases and acquire real estate, other assets and companies, the Minneapolis-based company said in a regulatory filing. Bentonville, Arkansas-based Wal-Mart Stores Inc. is the world’s largest retailer.
NXP’s bonds climbed as the Dutch chipmaker boosted its offering. The company’s $913.9 million of 7.875 percent notes maturing in October 2014 rose 2.125 cents to 99.75 cents on the dollar to yield 7.94 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The new bonds are rated Caa1, seven levels below investment grade, by Moody’s Investors Service and an equivalent CCC+ by Standard & Poor’s.
Intel, Alcoa
Agilent Technologies Inc., the world’s biggest maker of scientific-testing equipment, sold $750 million of senior notes in its first debt offering since September, 11 weeks after Moody’s raised the Santa Clara, California-based company’s debt rating from junk to investment-grade.
The increase in bond offerings came as Santa Clara-based Intel Corp., the world’s biggest chipmaker, reported record second-quarter sales and topped analysts’ estimates with its forecast, allaying concern that a rebound in technology spending is losing steam. On July 12, New York-based Alcoa Inc., the largest U.S. aluminum producer, reported sales and profit that beat estimates and projected higher global demand for the metal.
“We’re focusing less on the backward-looking numbers than we are on the forward-looking guidance and prospects and views of the economy,” said Tom Murphy, a money manager who helps oversee more than $20 billion of investment-grade credit at Columbia Management in Minneapolis.
General Electric
Former Federal Reserve Vice Chairman Alan Blinder said the U.S. economy will probably grow 3 percent to 3.5 percent this year, less than his forecast in December for as much as 4 percent growth.
“The data over the last couple of months have given pause,” Blinder, a Princeton University economist, said in an interview on Bloomberg Television’s “Street Smart.” “I still doubt we will have a double dip” recession.
General Electric Co. bonds were the most actively traded U.S. corporate securities yesterday by dealers, with 131 trades of $1 million or more, followed by Citigroup Inc., with 105, Bloomberg data show. The most active in junk bonds was Anadarko Petroleum Corp., with 77 trades. High-yield, high-risk debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.
The extra yield investors demand to own emerging market bonds instead of Treasuries narrowed 13 basis points to 297 basis points, the sixth straight daily decline, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
Fannie Mae
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds narrowed 3 basis points to about 65 basis points more than 10-year Treasuries as of 4:45 p.m. in New York, Bloomberg data show. The gap reached 59 basis points on March 29, two days before the Federal Reserve ended its buying of $1.25 trillion of home-loan debt.
The cost of protecting Greek government bonds from default fell to the lowest in a month. Credit-default swaps tied to the indebted nation fell 27 basis points to a one-month low of 784, while contracts on Portugal dropped 6.5 basis points to 272.5, according to CMA.
Greece’s auction yesterday showed improved confidence among banks in Greece, which purchased 80 percent of the 1.625 billion euros ($2.1 billion) of 26-week bills. Prime Minister George Papandreou’s government cut wages, postponed retirements and raised taxes to trim the euro-region’s second-highest budget deficit and restore investor willingness to lend. Portugal plans to sell up to 1.5 billion euros of bonds due 2012 and 2019 today.
Corporate Swaps
Credit-default swaps on the Markit iTraxx Europe index of 125 investment-grade companies dropped 3.1 basis points to 112.1, the lowest since May 18, according to Markit Group Ltd.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.
A measure of bank creditworthiness also fell to the lowest since May 13 as the U.S. Senate plans to pass a financial- regulation bill on July 15.
The CDR Counterparty Risk Index, which tracks credit swaps on 14 of the world’s largest banks including Citigroup Inc. and Bank of America Corp., dropped 3 basis points to 137.2, according to New York-based Credit Derivatives Research LLC.
“The financial reform bill in the U.S., we know more now about what it’s final state is going to be and it doesn’t seem to be as draconian as what we thought six months ago,” Tornga said.
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