Bank sector bonds take a hit

IB Corporate Bond Brief: Bank spreads widen out: Conglomerates in demand

Banking names were again coming under the hammer in the corporate bond world as financial paper continued to suffer as government bonds failed to follow-through on a positive start. Spreads continued to widen as buyers took another step back. Morgan Stanley, Goldman Sachs and Bank of America each saw its bond prices take a hit as yields crept higher while British bank Lloyds TSB saw its five-year maturity take a loss of $2.00 as yields jumped.

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INVESTMENT GRADE

Nasdaq OMX Group (NDAQ) – Uncertainty that it could muster the approval of the Department of Justice over competitive issues led to the withdrawal of a hostile bid from Nasdaq OMX and the Intercontinental Exchange for control of the NYSE. Shares in the exchange slumped by a little short of 10% on disappointment that there would be no bidding war, while the two potential buyers fared minimal losses before investors revamped an interest in shares of Nasdaq OMX. Bonds issued by the exchange also surged by upwards of $2.00 per $1,000 face value as investors expressed relief that the debt burden wouldn’t rise should the battle have been won. About $10mm of Nasdaq OMX’s 5.55% paper maturing January 2020 changed hands with buyers pushing the yield on the Baa3-rated paper down to 5.33%.

General Electric (GE) – The flight towards defensive industrial and conglomerate names in the corporate bond market continued Monday. In highest demand today was General Electric’s one-year paper maturing June 2012 carrying a 6% coupon. Buyers advanced the paper by 12 cents per $1,000 face value lowering its yield to just 0.48% on volume of more than $70mm. GE’s five-year paper advanced again with the yield sliding to 2.95% on its May 2016 maturing paper.

HIGH YIELD

JC Penney Co. (JCP) – Corporate bonds in the Plano, TX-based department store owner jumped on Monday after the company delivered a rosy outlook. At Ba1 JC Penney’s rating is at the top of the non-investment grade universe and is perhaps heading back in to the top-notch league after the company predicted that second-quarter earnings would be three cents better than the average of analysts’ projections even after a six-cent restructuring charge. The news follows the restructuring efforts that have seen the company shutter outlets and close-down its catalog operations. Shares in the company rose to $41 each following the announcement as investors cheered the news that management’s earlier in the year discussions with activist shareholder and hedge fund operator William Ackman were filtering down to the bottom line. Demand for JC Penney’s longest-dated paper was most notable with over $1mm changing hands in its October 2036 maturity most active. The bonds increased in value by $1.25 per $1,000 sending the yield on the 6.375% paper lower to 7.18%.

Edison International (EIX) – Yields slid on actively traded paper maturing between six and eight years at B3-rated Edison after favorable auction results showed the Southern Californian public utility provider continues to grow its energy-creating capabilities. Yields on its May 2017 and May 2019 maturities slumped by around 80 basis points to 10.57% and 10.36% respectively on Edison’s paper. An auction by PJM Interconnection that measures forward supply of electricity generation continued to paint an upbeat assessment of utility suppliers, who it said continue to add generating capacity and make investments to enhance existing power output. Investors take the results as a sign that future revenue growth is assured.

For live pricing and current inventory please see Bloomberg page IBCO.

Customers can access Interactive Brokers corporate bond offering through their Trader Workstation platform. For clients wanting more market color or inventory details please contact Jesse Muscarello in the New Jersey office at 201-946-5431.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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