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.
Credit Suisse (CS) – Investors also tossed out paper issued by credit-crisis bailout victim Credit Suisse. It was on the receiving end of a lifebuoy tossed out in the rough seas in 2009 by the Swiss government. In an effort to prevent the same thing happening again the Swiss are introducing more stringent capital requirements. For its part Credit Suisse said the proposals were “tough but doable,” adding that it would need time to digest while implementation might require it to relocate parts of its body outside its domicile. Nervous investors dumped more than $20mm of its August 2020 paper on Wednesday and in a rush to exit slashed the price per $1,000 invested to 99.48 for a loss of $2.40 while raising its yield to 4.44%. The spread to treasuries widened by four basis points to 145 basis points. ADR shares in Credit Suisse tumbled to the lowest since December 21 in New York on Wednesday.
Muni-Bond Corner – Outperformance in the muni-bond market that characterized Tuesday’s session came to an abrupt halt midweek as treasury yields slide over Greek default fears. Several new issues are holding the muni-market from rallying. Princeton University issued $250mm in tax-exempt securities Wednesday reversing a slashes to 2009 capital expenditures following a decline in its endowment. These bonds are priced on top of the 30 year triple-A curve at a yield of 4.40%.
California lawmakers are racing to approve a balanced budget by midnight tonight at the risk of losing pay. The budget would extend temporary taxes to partially plug a gaping $9.6 billion budget gap. California is rated single-A and the rating agencies have said it is important to pass a budget that relies on recurring revenues or spending cuts, rather than one-time fixes. If delayed, the state will be unable to issue new debt.
The number of people who reported incomes of at least $200,000 and paid no U.S. income taxes jumped 79.5% in 2008 from 2007 according to an Internal Revenue Service study.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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