Corporate bond activity was mixed Thursday as investors weighed up what to do next in light of a weaker than hoped for second glance at growth for the three months ending March. Weaker consumer activity weighed on sentiment dragging benchmark indexes lower while propelling government bond yields to the lowest so far this year. Generally, corporate paper moved with Treasuries, although the task of keeping step with further slippage in government yields is proving harder in light of the jump in quality corporate issuance during the past month. Cisco and Procter Gamble were notable names where investors appeared to be willing to jump off the bandwagon after seeing capital gains from longer term debt.
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Investment Grade -
Cisco Systems Inc. (CSCO) – Paper in A1-rated Cisco, the world’s largest maker of network equipment was the most actively traded on Thursday. Institutional investors appear to have turned sellers judging by the $58mm face value changing hands keeping yields a little firmer on its January 2020 maturity. Possibly behind the selling is the recent vast amount of fresh supply of quality investment grade paper leaving investors overly stocked with tip-top names having to cherry pick what can stay and what can go. The 4.45% coupon has traded well since April 8, when the cost of each $1,000 bonds rallied from a low at 101.58 up to 104.40 today. At the same time, investors have grimaced as the company axed its flip-video camera business and is looking to streamline some consumer businesses that have failed to take off. Industry analysts predict 5% of jobs will go as the company aims to slash costs by $1 billion. As its bonds rallied during an admittedly bullish run for fixed income, Cisco’s share price sank in the same period from $17.63 to a low today at $16.16. It appears that some feel this inverse relationship may be poised to come to an end.
Procter Gamble (PG) – Judging by the drop in the price of Procter’s AA3-rated march 2037 maturity today, it appears that the same rationale may hold true for its longer-term bonds. Investors sold $15mm of its paper slashing 73 cents off a face value of a $1,000 holding. The yield rose to around 4.81% at the same time as longer-dated government benchmark yields were falling with the 30-year losing five basis points to 4.23%. Economic weakness dimmed investors’ appetite for further-fuelling a stock market rally with shares in the consumer staples provider sliding from a 52-week high last week. It seems that swollen corporate supply has dulled appetite towards stale issues. Shares in Procter Gamble tumbled 0.8% Thursday to $65.84.
High Yield -
Anadarko Petroleum Corp. (APC) – Not quite the bent penny that keeps showing up, but it seems that demand continues to remain firm for paper issued by Anadarko on possibly firming fundamentals. Last week we noted that its paper prices surged following relief that BP had settled with a Japanese partner, indicating lower potential liabilities towards clean-up costs on behalf of Anadarko. Demand for its bonds rated as Ba1 by Moody’s maturing between 2016 and out to 2040 continues to flow to the top of our market scanner and by mid-morning we estimate that deals totaling $75mm have traded. It’s possible that investors are gravitating towards this name as a result of the lower perceived liabilities, which could result in an upgrade for the name. If that occurred Anadarko would cross the rubicon into the investment grade universe lending added appeal to its paper. Yields slipped across all bonds in today’s brisk activity. Most heavily in demand was Anadarko’s September 2017 paper carrying a coupon of 6.375% whose yield to maturity slipped to 3.77%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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