Corporate bonds rocked as risk aversion rises

Investors seem unsure how to react within the confines of the corporate bond market to rising risk aversion around the world. Government bond prices are shifting in all sorts of directions in response to panic over sliding stocks, growth and earnings fears and rising political tensions in Europe. Some financial names are weaker Monday with spreads widening relative to U.S. government debt, while broadly speaking volumes are a little calmer than last week. Thin volumes are evident in the non-investment grade universe.

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Investment Grade -

Johnson & Johnson Inc. (JNJ) – Shares in consumer-products-manufacturer are outperforming the market, although are down by 0.5% at $65.25 in a soggy day for trading. Johnson’s AAA-rated May 2021 bonds were well-supported in such an environment where investors are looking for solid yield with as little risk as possible. The paper commands a 3.58% yield and stands about 50 basis points above 10-year government paper. Investors raised bids on about $28mm worth of paper today lifting the value of $1,000 worth of bonds by 37 cents. Johnson & Johnson also announced further expansion into emerging markets Monday with the purchase of over-the-counter medicines sold in Russia. The company paid JB Chemicals and Pharmaceuticals $260 million for cough and cold remedies.

Bank of America Corp. (BAC) – The most actively traded investment bonds belonged to Bank of America on Monday where investors sold $33mm lifting the yield on its 10-year 5%-coupon paper to 5.03%. The price of $1,000 worth of its paper slid by $2.30 as investors turned prices sour on the consumer banker. Bank of America’s share price also declined by 1.2% to $11.44 Monday.

Barclays Bank PLC (BACR) – Investors used the rising tensions on the other side of the pond as an excuse to sell paper issued by Barclays. Its Baa1-rated October 2020 carrying a 5.14% handle slid by $1.43 per $1,000 face value as investors lightened the boat of European names. Some $33mm face value changed hands Monday in this particular Barclays issue.

High Yield -

Evergreen Solar Inc. (ESLR) - Almost eleven years ago Massachusetts-based Evergreen Solar, manufacturer of solar photovoltaic cells and panels launched an initial public offering. Ahead of the collapse of the financial markets in 2007 its shares reached for the sun as all-things solar-powered found popularity among an army of alternative energy investors lifting its shares to above $112.00 at the peak of its popularity. Since the recession when deficit-fighting European governments withdrew subsidies and spending on green initiatives the company has done nothing but struggled. Last week’s earnings saw losses rise in light of falling revenues and, as if that wasn’t enough, the Boston Globe reported that the Economic Assistance Coordinating Council had voted to end a 20-year property tax break estimated initially to be worth $15 million, while scrapping state tax credits worth $3.5 million. It also rubbed salt in Evergreen’s wounds by apparently writing a retroactive bill to the company claiming $1.5 million in property taxes. Shares fell to their worst ever Monday reaching close to 71 cents. Of course drawn in to the turmoil was paper issued by the company. Investors sent Evergreen’s July 2013 maturity down to just 14 cents on the dollar as the rainclouds gather over the company’s prospects.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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