Bankers’ paper still out of favor as yields reverse

Treasury prices slumped following several favorable economic reports, and while it was not good news to see retail sales decline during May, there was a huge sigh of relief that the report was not as dire as predicted ahead of its release. The yields at the 10-year maturity climbed by 3.07% leaving them well clear of the 3% hurdle while financial issues also continued to suffer even as most banks share prices joined in the rally. One major exception was Bank of America where the lender remains in the dog house following the finding that by delaying and refusing to offer appropriate materials, it had hindered a government enquiry in to foreclosure practices.

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Investment Grade -

Goldman Sachs Group Inc. (GS) – Spreads at banks widened versus treasuries as corporate bond prices fell harder than government securities. A reminder of the cooler attitude towards the banking sector came Tuesday from Fitch ratings who noted that the total value of loans on banks’ balance sheets had contracted for 11 consecutive quarters to levels last seen in 2006. Naturally that’s not such a good sign for investors looking for growth in earnings stemming from an artificially depressed yield curve thanks to the Fed’s strong-arm tactics. Banking paper continues to trade weaker as investors look for alternatives. Goldman’s June 2020 maturity traded with a loss of around $1.75 per $1,000 invested forcing its premium to treasuries from 180 basis points to 196 basis points as fixed income investors did battle with a modest dip in retail sales.

Bank of America Corp. (BAC) – While the broad-based S&P 500 index might have advanced by 1.5% on Tuesday, shares in Bank of America continued to languish following the government’s finding that the nation’s largest housing lender had “significantly hindered” a federal review of home loan foreclosures insured by the Federal Housing Administration. Shares in the company are adrift of the benchmark by 2.3% today while investors selling its August 2016 bonds drove the yield 15 basis points higher to 4.08%. The paper was second-most actively traded on volume of $38mm. The issue continues to underperform the broad market with the premium over treasury securities now having widened from 200 basis points on June 1 to 240 points today.

Non-Investment Grade –

MGM Resorts International (MGM) – A three-week slide in its shares resulting in a 22% loss of market capitalization at the resort-provider has raised its appeal according to a couple of analysts watching the name. On Monday Bernstein raised its view from ‘market perform’ to ‘market outperform’ while on Tuesday Citadel raised its outlook from ‘neutral’ to ‘add.’ Its Caa1-rated paper maturing April 2013 was well sought after on Tuesday with buyers hunting around for about $12mm of the issue. The 5.29% yield tightened relative to treasuries by eight basis points on the day leaving the spread at 586 basis points above government short-dated paper.

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.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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