Corporate paper benefits from risk aversion

IB Corporate Bond Brief: Heavy bond sales as Gap falls from the retail clouds

Risk aversion remained a critical driver sending government bond yields lower and creating a comfortable backdrop for corporate paper. However, the path is never smooth as was amply demonstrated by a price gap lower for leading retailer The Gap. Investors looked instead to Macys paper for lower risk and better value.

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Investment Grade -

Gap Inc. (GPS) – A warning of clouds on the retail horizon from skinny-denim outlet The Gap Inc. had the impact of downsizing its market capitalization by 17%. Shares slid to $19.33 from a close at $23.33 and fast-approaching its February weakness at $18.94. There was heavy trading in its April 2021 maturity where bonds valued at $138mm changed hands causing losses of $1.70 per $1,000 face value. Gap is rated Baa3 by Moody’s meaning it’s at the bottom of the investment-grade universe and just a notch above the highest level non-investment grade of Ba1 where Macys sits (M). Earlier in the week we noted strong appetite for its corporate paper and given the continuing bid today, one can’t help but wonder if the two entities might not be on the verge of a switch between universes. Spreads between government and Macys debt tightened once again Friday despite a guarded response to the warning from The Gap forcing its shares to retreat from Thursday’s multi-year peak.

Petrobras International Finance Inc. – Demand was firm for Petrobras paper Friday with buyers lowering the yield on its March 2019 paper down to 4.68%. The price of its 7.875% coupon rose 40 cents to 120.68 as $15mm worth of its debt changed hands. On Monday shares in the Brazilian oil explorer and producer reached a 52-week low and are hovering just above it as the week draws to a close. But spreads on its paper continue to narrow relative to treasuries. Its eight-year paper has fallen by 50 basis points since early-April while on a year-to-date basis its total return of 5.21% is twice that of the all-government index.

High Yield -

Andarko Petroleum Corp. (APC) – An agreement between BP and Mitsui & Co. Ltd., who agreed to pay $1.1 billion towards costs relating to the Macondo Well cleanup boosted demand for Anadarko’s shares and paper Friday. In agreeing to share the cost of the oil spill, BP’s 10% Japanese partner in the well, has lessened the perceived liability on Anadarko, which owns 25% of the Macondo Well. Friday’s settlement is said to reduce the estimated liability for Anadarko to $2.66 billion and lower than previously expected. Shares surged 5.2% to $75.34 while seven issues of its Baa1-rated paper were highly sought as buyers took advantage by reducing its cushion over treasuries. Some $216mm of its paper was bought across six issues with various maturities spanning 2016 to 2040. The yield on its September 2017 maturity slipped by 13 basis points on the session to stand at 3.74% at lunchtime and outpacing a dip in the five-year government index, which eased by three basis points.

SuperValu Inc. (SVU) – It’s been a challenging week for supermarket Albertsons’ owner SuperValu Inc., resulting in a 3.4% slide in its shares to $10.63 Friday less than three weeks after trading up to its highest valuation in seven months. On Monday a filing from Soros Fund Management revealed closure in its holding in the company while ongoing union discussions with Californian grocery workers look far from resolution. Investors also tried to steer clear of its paper maturing May 2030 as potential risks rose. At one point the paper traded down $3.40 per $1,000 face value to 92.50 although staged a recovery later in the day. The yield to maturity on the 8.7% coupon added seven pips on the day to 9.45%.

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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