Caution in the equity market boosted demand for the safety of government paper at the end of a bad week for investors. Interest rate expectations mellowed after several Fed speakers expressed disappointment earlier over the slow progress the economy was making deep into an economic recovery. Earlier fears over escalating inflation have subsequently given way to concern over where the stimulus-laden economy might find its next spurt of growth from. Bond yields tumbled around the world spurred on by growing fears over Greece. Nevertheless, spreads widened between government and corporate paper as dealers wondered how much lower yields might go while fretting further over the prospects for earnings.
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Investment Grade -
CenturyLink Inc. (CTL) – Baa3-rated Centurylink, provider of local and long-distance phone, Internet and broadband communications services is hoping to tie the knot on a merger with SAVVIS Inc. towards the end of 2011. But before it can, it has to dial in to the debt market and tap a further $2 billion. The company announced earlier in the week that it was offering new issues with maturities of six-and 10-years while it reopened its September 2039 maturity, doubling that maturity to $800 million. In mid-April that issue traded at a premium to long-dated treasuries by around 300 basis points. That spread had widened by the time of the announcement to 334 basis points as the rally in corporate paper failed to match an advancing treasury market. But after Centurylink priced the deal to yield over 8% to maturity, some indigestion followed and as a result the two bonds have moved in opposite directions today leaving the spread blowing out to 361 pips. Trading was extremely active at $123mm with sellers driving the cost lower by $3.22 per $1,000 bond. At the last glance the paper was priced at its mid-point to yield 7.84% from a closing yield yesterday of 7.56%. The 30-year government long bond rose almost a full point sending its yield five basis points lower to 4.17%.
Altria Group Inc. – (MO) – A day after warning that it would take a one-off charge of $630mm on account of a leveraged lease transaction while maintaining its earnings guidance, investors turned sellers of the tobacco-maker’s longer-dated paper. Sellers unleashed more than $40mm of Altria’s November 2038 paper costing holders of each $1,000 face value a loss on the day of $1.56. The yield rose to 6.68% adding 20 basis points on the session while widening out by 25 pips over treasuries.
Non-Investment Grade –
Anadarko Petroleum Corp. (APC) – The incessant appearance over the past few weeks of Anadarko’s paper in our market scanners possibly hints at the likelihood of a ratings upgrade into the investment grade bracket. Once again it’s hard not to see the activity in Anadarko’s corporate debt even as its share price bled by more than 2.2% falling to $73.00. Anadarko’s Ba1-Moody’s credit rating leaves it one notch below investment grade and seems to be the star attraction in perennial hope of an ultimate upgrade. Investors traded $51mm of APC’s September 2017 issue and half as much again of its shorter September 2016 issue advancing both by 35 cents per $1,000 invested. Its long-six-year yield eased to 3.75% while its long-five year yield eased to 3.32%. And with around $13mm traded in its March 2019 maturity the issues occupied three of the top four most active secondary issues on Friday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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