Retailers' longer-dated bonds fare well on job hopes

Equity investors reveled in signs of an improving labor market the day before an official government report may yet deliver a disappointing reading. Stocks jumped after retailers put on their best performance in seven years, while the Wall Street Journal points out that 87% of them topped same store sales predictions. Wal-Mart, whose shares limped behind more nimble brands, saw huge demand for its longest-dated issue and was among several retail names where investors cast their nets in the hunt for yield in the corporate bond market.

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Investment Grade -

Wal-Mart Stores Inc. (WMT) – During April the world’s largest retailer issued a couple of billion worth of bonds with a 2041 sell-by date. Volume of almost $120 billion today is way off the radar and very likely bears the hallmark of an institutional buyer. The rise of 53 cents per $1,000 invested is a tell-tale sign that buyers are on the hunt for longer-dated maturities on a day when the U.S. yield curve rose in response to an unexpectedly robust addition of 157,000 private jobs during June according to payroll processor ADP. The 30-year yield added a basis point while Wal-Mart’s longest issue saw its yield slip by a couple allowing a narrowing in the spread over governments to just 26 basis points.

Home Depot Inc. (HD) – Midweek investors looked to Home Depot’s 10-year issue, while today it’s the turn of its 30-year paper. The mild uptick in treasury yields today is clearly seen as a buying opportunity in light of potential positives for consumers. Since May 4 nationwide gasoline prices have come down by 10%, while many retailers were successful in slashing prices to clear inventory ahead of stocking in time for back-to-school sales. Home Depot’s April 2041 maturity was active among investors with $33mm changing hands by mid-afternoon and its price advanced by 36 cents per $1,000 invested sending the yield-to-maturity lower by two basis points. Earlier in the week the premium demanded by investors bearing 30-year risk in this Baa1-rated bond compared to government paper was 138 basis points. In today’s action that premium has narrowed to 132 basis points.

Petrobras International Finance Co. (PETBRA) – Not all issues narrowed relative to treasury paper on a day in which commodities rebounded and equity prices made solid anticipatory gains. Brazil’s state-owned oil company Petrobras saw its 10-year bond maturing in January 2021 decline by 64 cents per $1,000 investment lifting its yield to 4.95% at a time when benchmark treasury yields staged a four basis point rise. The wider spread was driven primarily by a heavy amount of selling with volume of $75mm the second highest on today’s market scanner.

Muni-Bond Corner - Yields in the Muni market have moved up 2bps across the curve in sympathy with the treasury market following the ADP report perhaps portending a strong official report on Friday. State and local governments seeking to meet cash-flow needs as they start a new fiscal year will issue short term notes in July, August and September Moody’s said. Interest costs have declined sharply due to record low short term interest rates. Wisconsin offered $800 million yesterday and Harris County, Texas will issue $450mm. Los Angeles sold $1.2 billion of 2.5% notes on June 27 at an average interest cost of 0.26% with maturities February through August 2012. These are tax anticipation notes.

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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