Most stock prices recovered from another day of heavy selling as drama continued to unfold in Greece where investors are increasingly concerned that a default is the only likely outcome. Bond markets advanced causing two-year yields in the United States to fall to a record low while 10-year yields matched an earlier panic-induced low. Corporate bond trading continues to be dominated by an active exchange of bank-issued paper with Morgan Stanley today winning the most active issue. However, the bigger interest for bond investors followed the merger-deal-of-the-day in the energy sector.
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Investment Grade -
Energy Transfer Equity LP (ETP) – As and when Energy Transfer completes its $7.9 billion acquisition of Southern Union Company, if you look closely between the cracks in its footprint of the combined entity you’ll find 44,000 miles of natural gas pipelines. ETP is taking on $3.7 billion worth of Southern’s existing debt to make the deal happen, which might in part account for why some investors flinched on the news, marking down its 30-year offering by 80 cents on a $1,000 investment. It’s possible some investors may like the sound of the deal but don’t like the prospect of what a larger debt load may mean for the combined company’s investment rating. At Baa3 the company is at the lowest investment grade ranking. However, market sources indicate that the bonds are better bid than offered on today’s decline that saw $44mm worth of the issue change hands. Energy Transfer Equity’s 10-year paper was equally noteworthy with activity totaling $34mm. The spread relative to government debt widened on each bond. At the 10-year maturity the premium demanded by investors to hold the corporate issue widened out by 10 basis points while at the 30-year the spread added just five basis points.
Anheuser-Busch Cos. Inc. (BUD) – Shares in the merged Busch InBev brewer are facing a tough time and trading at a three-month low. But there was clearly something more appealing about its September 2037 maturity that drew demand from investors today who picked up more than $37mm of the issue adding more than $2.00 to a $1,000 purchase on Thursday. Its premium over long-dated government paper narrowed by four basis points to 114 pips as buyers maintained a bid.
Kraft Foods Inc. (KFT) – Kraft’s 6.5% coupon bonds maturing in February 2040 were quietly bid higher on Thursday with the yield to maturity sliding to 5.55% as investors snapped up around $15mm worth of its paper. A midweek “buy” rating was initiated on the stock by analysts at Jefferies whose $40 price target for the stock leaves 17% price appreciation from its current $34.25. At one point buyers lifted the price of its 29-year paper by more than $2.00 per $1,000 invested before demand let-up. The premium over Treasuries shrank by 12 basis points as investors feasted on the yield, narrowing it to 135 basis points.
Muni-Bond Corner – Municipal bonds have rallied lowering yields by 2-4 basis points at maturities spanning the 7-30-year range along with U.S. Treasuries after muni-debt prices underperformed markedly yesterday. Yesterday the market priced $705mm Los Angeles Department of Water and Power, power system revenue debt rated AA3/AA-. Yields on the deal ranged from 0.54% in 2013 to 3.26% in 2022. Also $448mm of New York City Municipal Water Finance Authority water and sewer system second general resolution revenue bonds, rated Aa2, AA-, were sold. Yields on the offerings ranged from 3.89% in 2026 to 4.43% in 2032. A further $610mm of AAA/Aaa-rated Utah general obligation bonds were also issued priced with a yield set at 3.48% in 2026. The offering was cheapened 4-8 basis points from retail pricing.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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