A softer economic outlook from the Fed and ongoing concerns that a Greek debt default has the odds of a coin-toss forced a widening of corporate bond spreads relative to a healthy U.S. Treasury market. Investors ran for the hills driving equity prices sharply lower and dismissed out-of-hand all observations that valuation remained cheap after a recent string of stock market losses. There were a couple of noteworthy trades where corporates outpaced gains in Treasuries leading to spread narrowing.
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Non-Investment Grade –
Rite Aid Corp. (RAD) – The spread demanded by investors to hold bonds issued by the drugstore-operator narrowed after it again reported stable revenues following ten-straight declines. The company pinned a smaller than expected seven-cents per share loss on the success of its customer loyalty program. Rite Aid said that its Wellness Plus program now had 40 million members who not only bought prescriptions but also accounted for 67% of overall sales of food and cosmetics. While a loss remains a loss, the fact that Rite Aid came in five cents better than a street forecast of 12.5 cents per share boosted demand for its shares, which bucked a bearish day on Wall Street to rise by more than 3% to $1.13. Its two short-maturity bonds were well traded accounting for total volume of $50mm. A 50-cent advance in the price of its March 2015 maturity was sufficient to ease the yield from 12.43% to 12.25% and accounting for a nine basis point narrowing in the spread to Treasuries, falling to 1080 basis points. Rite Aid’s paper is rated as Caa3 at Moody’s.
Anadarko Petroleum Corp. (APC) – There’s still no let up demand for Anadarko’s paper with its September 2036 maturity gaining by $1.00 per $1,000 invested pushing its yield lower to 5.99% on Thursday. Shares across the oil sector tumbled during the morning after the International Energy Agency said it would release 60 million barrels of stockpiled crude oil to alleviate pressure on supplies in light of a civil war in Libya that had in part caused a bottleneck. Despite the rally in its bonds, shares in Anadarko fared worse than most dipping by 3.3% to $70.25. The spread over treasuries narrowed by six basis points as the yield on Anadarko’s paper eased to 5.99%.
Muni-Bond Corner –
Secondary trading volume in municipal bonds has been low as the market has focused on the primary market. The market has underperformed the Treasury market with the AAA curve relatively unchanged in a week. The 10-year muni-benchmark yield is at 2.63% and the 30-year yield is at 4.24%. In yesterday’s sales the New York City Transitional Finance Authority issued $300 million of building aid revenue bonds in the competitive market. The bonds were rated AA3/AA- and sold at a spread of 61bps to the AAA benchmark. Citigroup priced $355- mm of Kentucky State Property and Buildings Commission revenue bonds rated Aa3, A-with yields ranging from 0.90% in 2013 to 4.74% in 2031 (+92 basis points). Some of the longer paper remained unsold. For municipal bonds please contact John Gallagher on 203-422-3621.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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