By Katy Burne
Long-dated Treasurys prices fell Tuesday, causing yields to bounce off their recent lows, but the new-issue market for company debt was wide open, despite a decline in new orders for manufactured goods.
A portion of the largest deal in the primary market from machinery maker Deere & Co. (DE) was slated to price with one of the lowest yields of all time for 30-year debt, said people familiar with its terms.
Meanwhile, a measure of default risk in company bonds, the Markit CDX North America Investment Grade index, was 1.2% improved toward the close--meaning the cost to insure the bonds fell from Monday's levels, underscoring the rosy outlook for corporate debt.
Also Tuesday, the Federal Reserve Bank of New York said it plans to auction $7.1 billion of complex-debt securities next week from a portfolio set up during the 2008 bailout of American International Group Inc. (AIG).
U.S. Treasurys prices moved sideways Tuesday as investors held their breath ahead of a series of potentially mood-changing policy remarks on tap in the coming days.
The European Central Bank gathers for its policy meeting Wednesday, where market participants hope for a rate cut to help bolster the region's economies. Though not widely anticipated, there are also hopes authorities will deliver another cheap funding facility to keep financial tensions at bay.
A host of Federal Reserve officials are also due to speak. Fed Chairman Ben Bernanke's testimony Thursday will receive extra scrutiny as investors look for hints about the chances of more monetary stimulus now that the nonfarm-payrolls report has disappointed for three straight months.
Europe's political and financial uncertainties have come hand in hand with mounting economic troubles, which investors fear will increasingly infect the U.S. recovery. A batch of manufacturing reports Tuesday showed euro-zone activity contracting further in April. Meanwhile, factory orders in Germany declined, echoing a similar slump in U.S. orders reported Monday.
In late-afternoon trading, benchmark 10-year notes fell 13/32 in price to yield 1.571%--this yield had fallen as far as 1.437% after Friday's weak jobs reports. The 30-year bond lost 1 11/32 to yield 2.633%. Two-year notes rose a fraction in price to yield 0.250%. Bond prices and yields move in opposite directions.
The primary market was in full swing, with Deere & Co. close to achieving one of the lowest corporate-debt yields of all time on part of a new $2.25 billion debt offering it marketed to investors, according to people familiar with its terms.
While the two-part transaction hadn't yet priced, a $1.25 billion batch of 30-year bonds was on track to price with a yield of 3.91%, people familiar to the transaction said. The bonds, which come due on June 9, 2042, represent a risk premium over comparable government debt of 1.30 percentage points and the second-lowest yield in corporate debt of that maturity, the people added.
The record-low yield for 30-year corporate debt is held by food-service giant McDonald's Corp. (MCD), which priced $500 million of 30-year debt at a yield of 3.73% in February.
The milestone comes as fears about Europe's sovereign-debt crisis have flared up again since a pronounced rally in the first quarter of this year, leaving investors chasing safer assets that still offer richer returns than those on offer in Treasurys.
"High-quality investment-grade corporates are attracting a lot of interest, particularly in the long end of the curve," said Andrew Karp, head of U.S. investment-grade syndicate at Bank of America Merrill Lynch, which co-led the offering. "The depth of demand, combined with the rally in Treasury yields, is producing very attractive coupons."
Rounding out the Deere deal was $1 billion of 10-year debt coming due in June 8, 2022, offered at a spread of 1.05 percentage points over Treasurys, the people familiar with its terms said.
Michael Lewitt, a portfolio manager and head of the opportunistic credit section of Cumberland Advisors, said in a note that, "While U.S. corporations are likely to experience some ill effects from a slowing global economy, companies are well-positioned to weather a slowdown" because they have "reduced debt, extended debt maturities, increased working capital, and built up healthy cash balances".
Also in the market were Paccar Inc.'s (PCAR) Paccar Financial for $550 million, GATX Corp. (GMT) and Cintas Corp. (CTAS), each for $250 million.
Europe's woes have spurred investors to dump riskier assets in recent weeks, pushing prices on high-yield, or junk, bonds lower and sending yields to their highest levels of 2012.
High-yield bonds offer an average 7.31 percentage points more than short-term Treasurys, their most attractive "spread" of 2012, according to Barclays data. The average yield on these bonds climbed to 8.08%, as of Monday, the highest since Jan. 5.
According to Citigroup, high-yield bonds lost 1.26% in May as mutual funds pulled out of the sector for three straight weeks, marking the worst performance since November. But junk bonds proved their worth as an alternative to equities, as the Standard & Poor's 500 fell 6.01%.
High-yield bonds have produced hefty returns so far this year despite the recent selloff. Any 2012 gains on the Dow Jones Industrial Average were erased over the past month, but the year-to-date return on high-yield bonds is 4.33%.
For investors confident that European leaders will find a way to resolve the euro zone's debt crisis, the valuations are looking reminiscent of the market lows last year, just before the market rallied.
"This a repeat of last year and the year before," said Gene Needles, chief executive at American Beacon, which manages $44 billion in multi-asset accounts. "It surprises me that we are in a third year of this and the majority of people are still saying, 'This time is different'."
Prices of top-rated municipal bonds were largely softer Tuesday, as Treasurys weakened and several new deals priced.
Thomson Reuters Municipal Market Data's benchmark scale showed yields on triple-A rated bonds were flat to up as much as four basis points. Bonds maturing in 2026 through 2042 fared worst.
The weakness came as the market digested a bevy of new supply, and some new deals offered concessions. For instance, New York City's Transitional Finance Authority offered higher yields on parts of its $800 million deal, as it offered the bonds for a second day to retail investors.
Other issues in the new-issue market Tuesday included a $311 million bond sale from Metropolitan Washington Airports Authority, a $159 million-deal from North Central Texas Health Facilities Development Corp. for a children's hospital in Dallas and a $134 million-offering from Oregon's Department of Transportation.
Overall, roughly $10 billion in new issuance is expected this week, according to MMD, up from the average $6 billion or so in deals seen in each week so far in 2012.
The New York Fed asked several Wall Street dealers to bid on seven collateralized-debt obligations from its Maiden Lane III portfolio on June 13 and June 15, according to a posting on the bank's website. The securities are known as Altius I Funding, Altius II Funding, Davis Square Funding II, Davis Square Funding III, Davis Square Funding IV, Davis Square Funding V and West Coast Funding I.
The Maiden Lane III sales come amid signs that residential-mortgage debt has largely held its ground in recent weeks as fallout from the European debt crisis turned many investors away from risk.
In mortgage credit, subprime residential mortgage-backed securities prices have been "relatively unchanged" since the first quarter despite the impact that Europe's sovereign-debt crisis has had on risk appetite, Bill Roth, co-chief investment officer at Two Harbors Investment Corp. (TWO), said at a Keefe, Bruyette & Woods Inc. conference.
The relative stability is likely due to stability in the lower end of the housing market, a lower threat of selling by the Fed and European institutions, and the raft of money that investors have earmarked to the sector.
Agency mortgage-backed securities extended their selloff as investors booked profits with many prices reaching record highs on Friday and prepayments suddenly of concern following the interest-rate plunge last week. Most of the MBS market underperformed falling Treasurys, according to Credit Suisse.
--Cynthia Lin, Patrick McGee, Kelly Nolan and Al Yoon contributed to this article.
Write to Katy Burne at [email protected]