Elevator-maker bonds on the rise

Bond prices fared a lackluster midweek rally ahead of the Fed’s lunchtime decision on monetary policy. The earlier nervous tone was set by investors’ ongoing anxiety over Greek Prime Minister Papandreou’s ability to garner sufficient support to forge ahead with further austerity measures following his survival in an overnight confidence vote. Financial and industrial-backed corporate paper was most actively traded in the secondary market on Wednesday with Goldman’s medium-term issue losing favor with investors.

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Investment Grade -

United Technologies Corp. – (UTX) – Investors buying bonds in elevator and escalator manufacturer, UTX, drove the yield down on its A2-rated July 2038 maturity by two basis points. Bonds issued by the provider of technology in industries from aerospace to building were in demand after the premium over treasuries widened out to 86 basis points. At the beginning of June that premium was six pips less wide while at the start of May the premium was just 75 basis points. Some of the spread widening is possibly accounted for by the decline in United’s share price, which peaked at the same time at $90.67 and since then has declined to $82.43. A recovery today to $86.12 for its shares appears to have been accompanied by rising appetite for its longer-dated bonds driving the yield lower to 5.05%.

JPMorgan Chase (JPM) – The bank yesterday agreed to pay a $153.6 million fine to settle an investigation in to allegations it misled investors while it used complex derivative investments tied to mortgage obligations as the housing market began its decline. Today its share price has rallied by 1% reversing a string of ugly losses while the company announced the issuance of possibly more than $500mm of five-year paper. The new issue likely priced to yield 165 basis points over treasuries, while existing continued to buy JPM’s May 2021 issue pushing the yield down to 4.48% on volume of $46mm.

Goldman Sachs (GS) – Both issues maturing March and June of 2020 were bid midweek with investors buying a combined total of $110mm of Goldman’s paper on Wednesday. Premiums over treasuries on both narrowed by two or three basis points as investors advanced both issues. Its paper was the most actively traded on Wednesday.

Caterpillar Inc. – (CAT) – A three-day rebound in the maker of machinery used in agriculture, forestry and mining has lifted its shares back above $100 for the first time in two weeks. Investors also lifted $30mm of its corporate paper in the secondary market ad focused on its recently issued 10-year paper maturing in May 2021. The yield on the A2-rated issue fell by nine basis points on Wednesday to stand at 3.69% while comparable treasuries erased an earlier gain leaving the yield unchanged at 2.99%. Caterpillar’s 10-year paper has narrowed the spread relative to treasuries by seven basis points since the start of June.

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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