Credit markets were in a cautious mood Monday as investors wait
for clarity from European policymakers and the kick-off to the
fourth-quarter earnings season in the U.S., which begins Monday
after the closing bell.
Safe-haven assets performed particularly well in the wake of
Germany selling EUR3.9 billion of six-month notes at a negative
yield. The benchmark 10-year Treasury bond rallied as much as seven
basis points in the late morning to 1.92%, but backed up in the
afternoon to 1.96%.
Municipal bonds rode the rally and didn't react much to the
sell-off. Intermediate-term tax-exempts improved six basis points
on the day, according to Municipal Market Data.
A benchmark gauge of the U.S. corporate-bond market, Markit's
CDX North America Investment-Grade Index, improved 0.4%, despite
heavy volume in the primary market. A similar index tracking
high-yield bonds was flat, however, indicating appetite for riskier
bonds was less robust.
A syndicate manager in New York said investors seeking
out-performance were best served by buying in the primary market in
2011, and the trend is holding forth in the New Year. As secondary
market liquidity continues to be thin because of the prospect of
new regulations, investors are gobbling up new issues, helping to
boost issuance.
"It's an attractive place to be," he said. "Treasuries are
yielding less than 2% and equities are all over the place, so from
a fundamental perspective investment-grade bonds are
compelling."
Treasurys
Worries about the euro zone sparked a flight into safe-haven
Treasury bonds Monday but the bond market rally petered out ahead
of $66 billion new government debt sales in coming days.
Bond dealers pushed down prices in late-afternoon session, a
typical way to cheapen up the market to make room for the new
supply. Moderate strength in the U.S. stocks also lured some cash
out of Treasurys.
The first bout of Treasury notes and bonds supply begins Tuesday
with $32 billion in three-year notes. A sale of $21 billion in
10-year notes is scheduled for Wednesday followed by $13 billion
30-year bonds Thursday.
Reflecting the supply pressure, the 30-year bond erased a rally
to trade 7/32 lower in price, yielding 3.025%. The benchmark
10-year note managed to hold onto to slim gains, with its price
1/32 higher to yield 1.956%.
Shorter-dated Treasurys did better, with the two-year note
rising 1/32 to yield 0.248%. The five-year note was 2/32 higher to
yield 0.844%. Bond prices move inversely to yields.
"The auctions put some pressure on the market, but my guess is
demand will be strong especially on the three-year notes," said
James Newman, head of U.S. government and agency trading in New
York at Keefe, Bruyette & Woods Inc.
Newman added that "customers are sitting on big cash positions
and the three-year notes are a safe bet" given that the Federal
Reserve has signaled to keep its policy rate near zero through at
least mid-2013.
Investment-Grade Corporates
Seven high-grade corporate borrowers tapped the bond market
Monday to take advantage of low yields and strong appetite for new
paper Monday.
A bond trader in Chicago said new-issue concessions--the extra
yield given to investors buying in the primary market--remain large
and attractive, and new bonds are tending to improve in the days
afterward, so there is much demand for new deals even though the
broader market is tentative or cautious.
"We can swallow a whole lot more new issuance," he said. "It's
not getting over-saturated at all."
Target Corp. (TGT) took advantage of conditions with a two-part
deal worth $2.5 billion. It sold $1 billion of 2.90%, fixed-rate
10-year bonds priced at 2.974%, for a spread of 102 basis points
over Treasurys, and $1.5 billion of floating-rate one-year notes
priced at a spread of three basis points over the London Interbank
Offered Rate.
Energy Transfer Partners LP (ETP), which is raising funds in
connection with its 50% acquisition of Citrus Corp., owner of the
Florida Gas Transmission pipeline system, sold $2 billion in a
two-part offering of 10- and 30-year bonds. Final pricing
information wasn't available at press time.
Tom Farina, head of corporate sector fixed income team at
Deutsche Insurance Asset Management, said the low-rate environment
continues to be a major boon to issuers.
"Demand for credit is actually outstripping supply, so even in a
more cautious mode, corporate bond pricing is compelling," he
said.
Virginia Electric & Power Co. sold $450 million of 2.95%
coupon, 10-year notes, pricing the bonds at 2.978%, or 105 basis
points over the Treasury rate, according to a person familiar with
the issue.
France Telecom SA (FTE.FR) sold a $900 million issue of 5.375%
coupon, 30-year debt, priced at 5.392%, or a spread of 240 basis
points over Treasurys.
New York Life Global Funding, a subsidiary of New York Life
Insurance Co., was also in the market to sell $300 million of
three-year notes in the Rule 144a private-placement market.
Allstate Corp. (ALL) was also in the market to sell $500 million
of 30-year bonds, and the financing arm of Toyota Motors Corp. (TM,
7203.TO) is selling five- and 30-year bonds.
A bond trader in Chicago said he was concerned the market hasn't
rallied in the wake of Friday's better-than-anticipated jobs report
for December. He suggested the flat tone indicates investors have
been expecting a sell-off and are waiting for some negative data to
initiate it.
"People are waiting for the slip," he said. "But a market
sell-off, I think, would be short and quick. There's a lot of cash
on the sidelines so the depth of a sell-off would be shallow."
Municipal Bonds
Top-rated municipal bonds showed gains Monday as demand remained
high and new issuance, though increased from last week, continued
to be relatively light.
According to a benchmark scale from Thomson Reuters Municipal
Market Data, prices of top-rated municipal bonds maturing between
2026 and 2034 showed the strongest growth, with yields dropping six
basis points.
Janney Capital Markets put new issuance this week at $5 billion,
significantly higher than last week's calendar of about $500
million. But this week's figure remained below the weekly average
for 2011, according to Janney.
"I think it's just a slow post-holiday start and that the
calendar will get larger in the coming weeks," said Alan Schankel,
director of fixed income research at Janney.
In the primary market, Colorado sold $230 million in tax
anticipation and revenue notes for its education loan program. A
preliminary pricing showed a single June 2012 maturity offered a 2%
coupon and 0.18% yield.
Ohio priced $171 million of general obligation bonds for
individual investors Monday, with a tranche coming due in 2021
offering a 5% coupon and 2.12% yield. Market participants expect
the bonds to be offered to institutions Tuesday.
Bank of America Merrill Lynch placed the winning bid for a $92.8
million competitive sale from Plano Independent School District,
reoffering a 2023 maturity at a 2.41% yield and 4% coupon.
Meanwhile, Fairfax County Water Authority raised prices and
lowered yields as much as five basis points on some maturities in
its $82 million water revenue bond deal, indicating good
demand.
Mortgages
Ally Financial and Banco Santander are among issuers bringing
more than $2 billion in automobile asset-backed securities to
market this week as persistent investor demand has pushed some risk
premiums to their lowest levels in 16 months.
The issues, led by a $1.08 billion Ally Auto Receivables Trust
ABS and a $775 million Santander Drive Auto Receivables Trust bond,
come as investors have been looking for securities that have shown
little volatility through the European debt crisis, even if that
means paltry yields, according to analysts. That demand continued
into 2012 as uncertainty of how European leaders would resolve the
fiscal mess, they said.
Yield spreads, or risk premiums, on one- and two-year prime auto
ABS have each tightened about 2 basis points since year-end to 11
and 18 basis points over interest-rate swaps, their lowest since
September 2010, according to Barclays. At today's swap rates, the
spreads mean yields of 0.72% and 0.83%, close to a longer-term
five-year Treasury note.
In mortgage-backed securities, most bonds outperformed Treasurys
after Fannie Mae and Freddie Mac late on Friday showed
slower-than-expected principal prepayments in December.
Investors are likely pricing in expectations that most borrowers
with loans in 4% and 4.5% MBS have already refinanced at low rates,
and won't have incentive or ability to do so again, analysts said.
Higher-coupon MBS were little changed to Treasurys amid heightened
uncertainty over the Home Affordable Refinance Program's redoubled
efforts to refinance borrowers that have been unable to tap low
rates for years.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382;
patrick.mcgee@dowjones.com
--Al Yoon, Min Zeng, and Mike Cherney contributed to this
article.
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