Corporate bond spreads relative to treasury had narrowed all week long on growing optimism that the second-half of the year might deliver a rebound for growth. Equity prices had earlier in the week approached the year’s most optimistic point only to come crashing down in response to a rather limp reading of the labor market. Yesterday’s optimism today came screaming down as the official government tally was so incredibly wayward that it sent government bond yields scurrying lower. But instead of blindly following the lead of government securities, corporate debt prices responded with some understandable caution forcing spreads to reluctantly widen back out again.
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Investment Grade -
Kraft Foods Inc. (HD) – You can always rely on macaroni cheese when all else fails to feed the kids. It’s a parents’ safety play when dinner is running late or the kids are getting fractious. Shares in Kraft Foods and maker of the staple food for all age groups, hit the highest price in four years this week as demand grew on guarded optimism over economic recovery. And if the recovery fails to show, investors are counting on Kraft’s ability is a bellwether to rise above stormy seas. Its paper was again in demand on Friday as bonds rose and stocks reversed a weekly gain. Investors headed for Kraft’s 10-and 30-year issues causing each to outpace the performance of treasuries. The February 2021 maturity narrowed the yield gap over benchmark treasuries by three basis points to 86 pips. Meanwhile its February 2040 maturity tightened by four basis points sitting 130 basis points above the 30-year long bond.
Bank of America Corp. (BAC) – Two of Bank of America’s issues claimed the top spots on our most active market scanner to end the week. Shares in the nation’s biggest bank lost more than 2% on Friday and remain uncomfortably close to the 52-week low established in June. Nevertheless investors seem to have confidence in the bank and keep on buying its paper. More than $45mm in each of its March 2016 and its May 2021 changed hands today and while the yield on its five-year issue marched steadfast in line with that of treasuries, its 10-year issue couldn’t keep pace. The yield on its 2021 A2-rated paper managed a seven basis point decline to 5.02% while 10-year government note yields eased by 11 pips to 3.02% widening the premium to 200 basis points or 2%.
Muni-Bond Corner - The secondary market continues to languish as retail investors balk at low yields despite the favorable technicals in the market. There are still residual balances of high grade Georgia General Obligations in the market from the new deal a few weeks ago. After the June payroll numbers muni-bonds rallied by two basis points at maturities spanning 5-30 years. That pales in comparison to treasuries which are between five-12 bps lower on the day.
Illinois State revenues increased 3.4% in the last year due to an increase in tax revenues from the recent tax increase. Fitch cut Minnesota’s AAA rating to AA- due to the political gridlock and the reliance on one time revenue gimmicks to balance the budget. The state faces a $5 billion deficit in its 2-year general budget. State operations were shut down July 1.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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