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
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