Equity traders have been more than willing on recent occasion to be rather forgiving of softness in some economic data points. They have been equally forgiving of crude oil traders who have managed to maintain triple-digit prices for a barrel of fossil fuel. Yet all the time bond traders have ground down their expectations over the path of where the Federal Reserve might tread in coming months. The sometimes imperceptibly softer data today met with the impact of ever-high energy prices delivering a crushing blow to the picture of the real economy. Job growth soured according to the ADP employment report while the ISM showed a seventh consecutive monthly cooling in manufacturing activity. Equity traders were somewhat shocked by the worsening fate of the economy and faced a dive from a high plateau, while bond traders merely put one foot in front of the next and passed another milestone, driving benchmark yields below 3% for the first time this year.
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Investment Grade -
Microsoft Corp. (MSFT) – When the economic going gets tough, buy a AAA-rated bond. At least that was the message midweek after investors responded to another economic soft patch. Microsoft’s February 2021 paper was the answer to some investors’ needs and was the most actively traded issue on Wednesday with volume building to $43mm. Investors bid the paper up to 104.22 for an advance of $1.34 per $1,000 face value at the day’s best levels, while subsequently the yield has pared its gains from 3.48% to 3.59%.
The Gap Inc. (GPS) – But not everything is on the rise simply because yields are falling. Investors are trying to figure out how to play a stock market slide using only the best corporate paper. Building on its recent miss on earnings and affirmed by a weakening outlook for the consumer in today’s numbers, investors sold out of Gap’s Baa3-rated April 2021 maturity dragging its price lower per $1,000 by $2.23. The yield rose to 6.19%. When the Gap launched its 10-year bond with a 5.95% coupon on April 8, it was prices to yield about 238 basis points more than the 10-year treasury yield. But investors have pounded the name since May when it revised its outlook and admitted the challenging retail environment it is facing. The divergence between Gap and U.S. Treasuries has been stark since launch date with government-backed paper sliding by more than 60 basis points while the yield on Gap’s issue surged by 25 pips leaving the divide at 325 basis points. With $32mm of this issue trading today it appears that investors don’t much care for Gap paper in their portfolios especially when the consumer is facing an uphill challenge.
Nokia Corp. (NOK) – Investors continued to slam Nokia following yesterday’s abandonment of its metrics. Such is consumers’ love of Apple’s iPhone that both Nokia and Research in Motion appears to be running on ice to keep up with the yawning gap between handset providers. Investors also abandoned around $20mm worth of Nokia’s A3-rated paper Wednesday sending its yield opposite to the prevailing market trend toward lower yields. Investors dumped Nokia’s May 2019 maturity shaving $1.20 per $1,000 face value off its price while lifting its yield to 4.70% adding 20 pips to the yield overnight. Year-to-date the bonds have returned 3% or 1% less than a comparable index of treasury securities.
High Yield -
Range Resources Corp. (RRC) – Independent natural gas and oil company, Range Resources also saw its paper buck the trend toward lower yields Wednesday with its June 2021 maturity shedding close to $1.00 per $1,000 invested. Its paper had been remarkably steady in value since issued last month although a 4% slide in its share price today to $53.80 was accompanied by investors turning hawkish on its bonds. While only $5mm of its bonds traded, Range Resources paper was within the top 10 most actively exchanged on Wednesday and yet the only issue that saw a net price decline while other issues followed the lead set by Treasury paper.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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