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).
Treasurys
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.
Investment-Grade Corporates
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.
Junk Bonds
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'."
Municipal Bonds
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.
Mortgages
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 katy.burne@dowjones.com.