Government bond prices accelerated midweek as investors not only reversed handsome gains made a day earlier, but also drove equity benchmarks to their weakest since the middle of March. At that time markets were rattled by the threat of nuclear fallout stemming from the Fukushima power plant disaster. A contraction in the Empire State manufacturing index appeared to depict a drop in output as a result of supply-chain restrictions, but still provided a dull view of the world’s leading economy. While some of today’s ugly showing is being blamed on intransigence between European lawmakers struggling to find common ground over a solution for Greece, it masks an underlying reality of a worrisome slowdown for global growth. Benchmark yields are again below 3% and look set to slip further unless the equity market stops bleeding.
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Investment Grade -
Morgan Stanley (MS) – Paper issued by the investment banker occupied three of the five most actively traded spots in the secondary market as investors ditched stocks heading into the safety of fixed income instead. Bank paper has underperformed government securities lately in the face of increased regulation, which many bankers claim will dampen revenues, and a slowing economy likely to result in lower loan demand not to mention rising and associated lending quality risks. Morgan Stanley’s four, five and 10-year maturities were sought after with trading across the three issues amounting to $167mm by noon in New York. The closest to maturity bond was the least actively traded issue and its price fell by about 20 cents. Meanwhile the April 2016 maturity advanced by 77 cents per $1,000 face value forcing its yield lower to 3.80%. Shares in Morgan Stanley fell by 1.8% and at $22.40 its shares stand just 2.3% above its 52-week low.
Bank of America Corp. (BAC) – While on the subject of 52-week lows, shares of Bank of America found support three cents above its annual low point at $10.41 this morning, while its secondary A2-rated paper was among the most actively traded corporate debt with $48mm changing hands.
The Gap Inc. (GPS) – It’s not just stocks that are sliding today with risk aversion propping up the value of the dollar, which is also playing a hand in weakening commodity prices. The price of cotton, which caused unpalatable earnings at retailer the Gap last month, is now around 25% lower than its peak and has fallen in sympathy with the broad slippage in commodities. Shares in The Gap are lower in line with stock market weakness, while investors continue to eject bonds issued by the retailer from their portfolios. The yield on its recently issued Baa3-rated 10-year debt jumped to 6.38% moving in the opposite direction to the broader paper market. Investors dumped $35mm of the 5.95% coupon paying notes slicing 38 cents per $1,000 invested off today’s price.