By DOW JONES NEWSWIRES
Credit markets continued to carry a positive tone Thursday and
investors were eager to buy new bond issues. Hope for a solution to
the European debt crisis and for the domestic economy to improve
pushed investors into riskier assets including stocks and corporate
debt.
Following some better-than-forecast U.S. data this
week--including Thursday's weekly jobless claims report--Friday's
jobs report will be key as market participants are anticipating an
improvement.
"Some investors are positioned for an upside surprise from the
jobs data," said Chris Ahrens, head of U.S. interest-rate strategy
at UBS Securities LLC. in Stamford, Conn. "The economy is still
chugging along with a 1.5% growth rate--low but not a
recession."
Investment-grade
Four high-grade issuers came to market Thursday, following on
from a week that had already included $3.8 billion in new
investment-grade corporate borrowing, according to data provider
Dealogic. Market conditions were encouraging, with the Markit CDX
derivatives index--a measure of U.S. corporate bond risk--improving
3.4% day over day.
BG Energy Capital PLC, the funding arm of U.K. utility BG Group
PLC (BG.LN BRGYY), led off with a sale of $3 billion of senior
unsecured debt--its largest-ever debt sale, according to Dealogic,
and the largest deal among high-grade issuers in the U.S. since
Intel Corp.'s (INTC) $5 billion on Sept. 14.
Oil-and-gas-services company Origin Energy Ltd. (ORG.AU) was
also in the market Thursday, with $500 million of 10-year debt
launched at 3.50 percentage points over Treasurys; along with
mining-machinery company Joy Global Inc. (JOYG), with a $500
million, 10-year deal to help fund its 41.1% acquisition of
International Mining Machinery Holdings (ICMHF, 1683.HK); utility
Public Service Co. of New Mexico with a $160 million, 10-year deal;
and Southern California Edison Co. with a $150 million, three-year
deal.
Junk
In the secondary market, junk issuers experienced surging prices
on existing bonds on improved investor expectations for a
resolution in Greece. Many buyers were eager to take advantage of
low prices and high yields.
In Hexion U.S. Finance Corp. notes due Nov. 15, 2020, there was
a rise in price to 73 cents on the dollar from 70.563 cents earlier
in the day. The yield on the bond, which moves inversely to price,
fell to 14.417% from 15.040%, according to MarketAxess data.
A gauge of investor sentiment, the Markit.CDX.NA.HY, rose one
point to 88.3, according to Markit data.
In the primary market, there were no new issues, though that
could change if the market condition continues.
Mortgages
Low-coupon mortgage-backed securities outpaced Treasurys as the
Federal Reserve reported its first purchases under its new
reinvestment program and investors swapped out of other MBS
considered vulnerable to losses if the government takes measures to
boost refinancing.
Demand was strongest for bonds paying 3.5% and 4% interest,
where the Fed has been expected to concentrate its purchases aimed
at supporting the ailing housing market. This afternoon, the Fed
said it bought $3.95 billion in the bonds over the last two
days.
The gains in current-coupon MBS narrowed their yield spread to
benchmark 10-year Treasurys to 119 basis points Thursday from 121
basis points Wednesday and 125 basis points Tuesday, according to
Locus, a Credit Suisse analytics platform.
Higher-interest MBS, such as those with 5% coupons, dropped more
than Treasurys as a top U.S. housing regulator said his agency
expects to finish work on an expanded mortgage-refinancing program
by the end of the month. Such an effort likely would increase the
speed at which loan principal is returned to investors, which
causes a loss as the money is returned at face value despite the
bonds' prices above $107.
Munis
Municipal bonds sputtered Thursday, as dealers and investors
struggled to absorb the recent torrent of new issuance against a
backdrop of weakening Treasurys.
Yields on top-rated muni bonds, which rose between five and 20
basis points Wednesday, were up anywhere from two to 12 basis
points, with the greatest weakness seen again in the 10-year area,
according to Thomson Reuters Municipal Market Data.
"There's a building sense that we backed off so quickly so fast
that the revenue pipeline that had looked so awesome lately is
shrinking," said Randy Smolik of MMD.
Yields on a $115 million competitive deal from the University
System of Maryland came in higher than where comparable bonds were
trading in the secondary market, similar to other new issues this
week, indicating that underwriters are having to offer price
concessions to investors to drum up interest.
The 30-day calendar of upcoming bond issues dropped to $7.8
billion from $12.5 billion Wednesday, according to Smolik.
Treasurys
Treasurys lost ground again, extending their losing streak to a
third-straight session. The three-day losing streak put a dent in
the nearly eight-month bull run of Treasurys, considered a safe
haven when other markets are in turmoil. The benchmark 10-year
yield, which moves inversely to its price, has risen by more than
30 basis points from its historic low set in late September.
With yields trading near rock-bottom levels, the market is prone
to bouts of profit taking. But some traders said yields are
unlikely to rise significantly and could even fall back again. They
cited supportive factors such as buying from the Federal Reserve
and uncertainty about an effective solution to the debt problems in
Greece and several other euro-zone member nations.
In late afternoon trading, the benchmark 10-year note was 24/32
lower in price to yield 1.988%. The 30-year bond was 1 19/32 lower
to yield 2.956%. Bond prices move inversely to their yields.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;
prabha.natarajan@dowjones.com
-Min Zeng, Al Yoon, Katy Burne and Michael Aneiro contributed to
this article.