Bonds suffered Tuesday as newfound confidence sent stock prices rising after European leaders edged a step closer to agreement on a plan that would prevent Greece from having to face increasing funding costs. Bond investors would be spared should they volunteer to roll debt over and technically preventing default. U.S. corporate markets were weaker as company paper slavishly got dragged down by the prospect of rising government bond yields. Nokia’s recent abandonment of its earnings outlook did it no favors and the ensuing storm looks challenging to navigate.
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Investment Grade -
Nokia Corporation (NOK) – Today’s Fitch downgrade for Nokia adds to the maelstrom the company faces in terms of competitive pressures. The two-notch ratings change leaves the company hovering one step above junk status and there could be more on the horizon as Fitch set the outlook to negative. Even by dropping its Symbian operating system in favor of Microsoft’s Windows, Fitch points to a lack of available products within its suite for testing maintaining pressure on its handset business and representing a challenge to cash flow. Investors ditched Nokia’s paper today about as fast as Fitch says customers are switching to cheaper Android handsets along with iPhones. Nokia’s May 2019 issues came under the surgeon’s knife as investors cut it out of their portfolios with $24mm trading as the price slid by $4.07 per $1,000 invested. The yield surged to 5.42% for a horrendous 68 basis point gain on the day while Nokia’s May 2039 maturity saw its yield jump by 42 pips to yield 6.91%. By way of consolation its share price remained relatively stable trading between gains and losses in a narrow 10-cent range at around $6.57.
Apache Corp. (APA) – Oil and gas producer Apache could be set to boost exports of liquefied natural gas to meet rising Asian demand according to a company officer. The company’s first LNG export plant is located at Kitimat in Canada and the company hopes to export most of its five-million tonnes per year to Asian buyers. Apache produces surplus gas from its shale gas fields and hopes growing cities in the Far East will be a perfect destination. A broker upgrade from Raymond James, who raised its recommendation from ‘outperform’ to ‘strong buy’ helped boost its share price by 1.5% to $119 Tuesday. Nevertheless Raymond James lifted its price target from $155 to $190. Meanwhile Apache paper was well-traded with $20mm face value exchanged among investors. Investors appeared to be buyers on dips on what was otherwise a bearish day for bonds with yields rising against the backdrop of a rally in equity prices. The yield on Apache’s September 2040 paper rose to 5.27%.
Non-Investment Grade –
Sallie Mae (SLMA) – For a second day paper issued by education-funding and student loan originator Sallie Mae was active in the secondary market. Traded volume on Tuesday morning of $15mm was around half of that of Monday. Since mid-January the paper has outpaced an index of three-to-five year government treasuries by 3.70% while recent volume patterns suggest that investors continue to find value in Sallie’s paper even as bond prices come off. The paper carries a mid-yield at 5.19% on Tuesday.
Anadarko Petroleum Corp. (APC) – Once again the pattern of heavier trading is showing up volume of Anadarko’s secondary paper. On half of the last 12 trading days volume has exceeded $25mm with today’s volume currently standing at $8mm making it the third most actively traded non-investment grade paper. Investors once again advanced prices sending the issue higher by 40cents per $1,000 invested allowing the yield on its September 2017 issue to decline to 3.77%.
Muni-Bond Corner -
Thirty-day visible supply has almost doubled to $9.9 billion from a recent low of $5.2 billion at the end of May. Supply in the market for municipal bonds has had a direct impact on the direction of yields. The recent drop-off in issuance has allowed yields to trade lower along with the broader government securities market. Year-to-date issuance has been tepid as states get their budgets in line but with many states’ fiscal years beginning next month this should add to issuance in the second half of the year.
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.
