Ipreo in the News
22 October 10
CREDIT MARKETS: Positive Tone As Earnings Season Is Strong
NEW YORK (Dow Jones)--There's a positive streak in the credit markets as earnings season has been strong.
"We ended the week on a positive tone because earnings have been robust, economic data hasn't fallen off the cliff and the foreclosure issue seems to be contained for now," said Scott MacDonald, head of research at Aladdin Capital Holdings in Stamford, Conn. "The trend is more positive than negative."
MacDonald said he expects a steady flow of issuance once companies are done with earnings.
That said, "looming over everything is the election season" and the Federal Reserve dabbling with monetary easing, "which may contain fallout on the economic front," he said.
Slowdown in Investment-Grade Corporate Bond Market
There was a lull in the high-grade corporate-bond market Friday: Issuance slowed and trading remained anemic in the secondary market. Risk premiums on bank debt remain bruised as volume remains thin.
EBay Inc.'s (EBAY) inaugural $1.5 billion issue traded well in the secondary market. The 10-year issue was last quoted at 73 basis points over Treasurys. It was sold at 77 basis points on Thursday. The five-year traded at 52 basis points from 57 basis points at pricing, according to MarketAxess.
In the meantime, Bank of America Corp. (BAC) and Citigroup Inc. (C) may have their credit ratings cut by Fitch Ratings because of new rules governing the way the Federal Deposit Insurance Corp. supports financial institutions that pose a threat to the health of the U.S. economy.
Fitch said it had put under review for downgrade those ratings tied to BofA and Citi debt that take into account government support. Other U.S. banks and bank holding companies were similarly affected, but the ratings company said BofA and Citi were "mostly impacted" because that implied support has given a "three-notch uplift" to their long-term A+ long-term issuer default ratings.
The rater added that it wasn't a foregone conclusion that the banks' ratings would immediately be cut if it could be determined that sovereign support could no longer be relied upon, because it would have to consider existing support already received.
On October 12, the board of directors of the FDIC announced that they had voted to approve a proposed rule clarifying how the agency would treat creditors of systemically important financial institution if they had to be wound down. The proposed rules aren't set in stone because they are subject to a public-comment period before being implemented, before which time they could change materially.
Steady Issuance In Junk Bond Market
Junk-bond issuance kept up the slow but steady pace it maintained throughout the week, with a couple of smaller deals on the schedule for Friday.
Prestige Brands Holdings Inc. (PBH) sold a $100 million add-on to its 8.25% senior notes due April 2018 at 102 cents on the dollar via underwriters led by Bank of AmericaMerrill Lynch. Sabra Health Care is expected later Friday to price $225 million of senior eight-year notes, also via Bank of AmericaMerrill Lynch, with price guidance in the 8.25% area.
Some signs of risk are emerging in lower-rated high-yield bonds, despite a generally benign default outlook. Bonds with the worst ratings--Caa or CCC, depending on the ratings agency--now yield 1.47 percentage points more than B-rated bonds on average, down from a 2.92-percentage-point median difference over the past five years, according to Moody's Investors Service. The 2.57-percentage-point gap between Caa issues and higher-quality Ba issues compares to a five-year median of four percentage points.
Those lowest-rated issuers pose a much higher historical default risk compared to higher-rated speculative-grade bonds, Moody's economist Ben Garber said. The average one-year default rate for Ba-rated issues is 1.1%; for B-rated issuers, it rises to 4.4% and, for Caa-rated issuers, it climbs to 14.7%.
"With CCCs even more richly valued than historically, the risk of poor relative returns in the future would appear to be high," said Marty Fridson, high-yield strategist at BNP Paribas.
The overall junk-bond market is now up 13.7% in 2010 to date, according to Merrill Lynch.
Municipal Bond Prices Hold Firm Amid Strong Demand
The prices of tax-free municipal bonds held mostly firm Friday, though there was some softness in intermediate-range bonds, as market participants prepared for another hefty supply week. An estimated $8.5 billion in debt is being offered next week via negotiated sales, according to Ipreo LLC.
A $750 million deal from New York City's Transitional Finance Authority and a $700 million sale from Connecticut--both with taxable Build America Bond portions--are two of the more sizeable offerings expected to sell next week.
With the extension of the Build America Bond program, created under the federal stimulus last year, still uncertain, a rush of issuance is expected with these bonds, which offer issuers a 35% subsidy on interest costs and offer higher interest rates than traditional tax-exempt muni bonds.
Also next week, California should kick off a series of multibillion-dollar short- and long-term financings, including its second-largest note sale ever, to enable the cash-starved state to pay off creditors and borrow money for other purposes.
The state, which enacted a budget 100 days late on Oct. 8, next week will negotiate a $6 billion to $7 billion bridge loan with banks including J.P. Morgan Chase & Co., a spokesman for Treasurer Bill Lockyer told Dow Jones Newswires.
That loan, larger by $1 billion to $2 billion than previous estimates, will be followed in the week of Nov. 8 with a $10 billion sale of revenue-anticipation notes, the spokesman said.
Meanwhile, demand continues to be strong for muni offerings, despite the heavy supply and worries about the crunched budgets of state and local governments.
Agency Mortgages Flat
Agency mortgages are unchanged as low supply and some demand have kept the market on the positive side. Risk premiums are at 148 basis points over comparable Treasurys yields. Some analysts believe that buyers are paying too much for these bonds in the anticipation of the Fed including mortgages in its second round of quantitative easing, or QE2.
Treasurys Fall, New Debt Supply On The Cards
Treasurys prices fell Friday as some investors cashed out of bets the Federal Reserve will buy government bonds on a large scale and braced for next week's $109 billion in new debt supply.
As of 2:39 p.m. EDT, the price of the benchmark 10-year note was 8/32 lower to yield 2.561%. The five-year note was 3/32 lower to yield 1.147% and the seven-year note was 6/32 lower to yield 1.858%. Bond yields move inversely to prices.
By comparison, the yield on the 10-year note ended last week at 2.567%, while the five- and seven-year notes were at 1.19% and 1.873%, respectively. The 30-year bond was 11/32 higher to yield 3.937%, also little changed from the previous week.
-By Anusha Shrivastava, Dow Jones Newswires
(Kellie Geressy-Nilsen, Katy Burne, Michael Aneiro, Kelly Nolan, Stan Rosenberg, Prabha Natarajan and Min Zeng contributed to this article.)
