IB Corporate Bond Brief: Bank debt hit hard as spreads widen on financial selling
A Moody’s rating agency warning over an, albeit slim, likelihood of a government default put government debt prices on the defensive. Traders attempted a rally for riskier assets ahead of the market opening on Thursday only to get beaten back by further worries arising over the economy. Factory orders fell harder than expected while in-line initial claims did little to steady nerves ahead of Friday’s crucial employment report. On the basis of weakness within an earlier ADP survey of private employers many Wall Street houses have curbed their prediction for Friday’s number. Bond prices eased on Thursday but waning confidence in the financial sector meant that bank issues were expelled from many investors’ portfolios sending paper prices sharply lower.
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Morgan Stanley (MS) – With $65mm of its January 2021 maturity on the loose on Thursday, paper issued by Wall Street banker Morgan Stanley had the dubious honor of being the most actively traded issue. Investors sold the 5.75% coupon-carrying paper leading to losses of $1.32 per $1,000 invested and driving the yield higher to 5.23%. Financial stocks were hit hard earlier in the week on fears that the economy is coming to a standstill and staged the worst performance in 10 months.
JPMorgan Chase & Co. (JPM) – The yield premium on JPMorgan’s 10-year paper widened out by three basis points over comparable treasuries as its paper was heavily sold by investors. Around $50mm of its May 2021 issue changed hands with holders losing 88 cents per $1,000 bond as the price eased sending the yield higher by 10 basis points to 4.57%. To illustrate the reversal in sentiment taking place, the price of the bond is fast-approaching par having traded as high as 103.65 on Wednesday. Shares in JPMorgan fell by 0.7% to $41.47 leaving them at the weakest since December 21.
Bank of America Corp. (BAC) – Shares in Bank of America have been under constant pressure since February and in today’s melee at $11.08 came within 17 cents or 1.5% of a 52-week low established in November. Its share price has since has since turned in to the green on the day as bargain hunters buy. Meanwhile its corporate paper was also under heavy pressure with investors ditching $43mm of its A2-rated May 2021 expiration driving the yield up to 5.08% compared to the 5% coupon it carries. The price slid $1.31 per $1,000 invested through par having traded to as high as 103.40 on Wednesday.
Time Warner Inc. (TWX) – Paper issued by cable and network entertainment provider Time Warner slumped Thursday with its 10-year maturity shedding $1.20 per $1,000 face value as dealers ditched $38mm of its March 2021 maturity. The yield on the paper rose to 4.51% from 4.45% on Wednesday.
Positive technicals dominate the Municipal market. Municipal issuance is down approximately 50% YTD and there is a record reinvestment of bond redemptions expected this summer with some $48 billion principal payments due June 1st and $30 billion due July 1st. The technical situation has been responsible for driving the market higher since April and the question is whether the rally has run its course will remain firm until August. Yesterday New York State Environmental Facilities Corp issued $521mm and yields dropped 6 basis points due to large investor interest. Bonds were issued at 36 bps over the comparable AAA scale.
Senior Market Analyst
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