Dynegy slides again as investors mull bond default

Bond prices weakened in response to testimony in Congress by Fed Chief Bernanke after he said the central bank would provide additional monetary stimulus if and when it was required. In an otherwise bullish reflection of the U.S. economy in which he anticipates growth will accelerate, Mr. Bernanke also warned that the committee might yet get it wrong should employment continue its lackluster recovery or should the European debt crisis jolt the global economy. However, risks clearly remain with investors unwilling to sound the all-clear and bonds have turned higher in the afternoon despite a string rally for equity issues.

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Investment Grade -

Bank of America Corp. (BAC) – Top of the investment grade highest volume board today is Bank of America where its short-dated paper was in vogue among fixed income buyers. Most popular was its recently issued 3.75% July 2016 maturity, which investors continue to use to rebalance their portfolios. Its price slipped by around 50 cents per $1,000 invested to 100.87 with its yield-to-maturity at 3.55%. Volume on this A2-rated issue at $84mm bonds was slightly higher than BAC’s June 2012 issue which dipped by 10cents per $1,000 investment. Its yield trades at around 0.25%.

Non-Investment Grade –

Dynegy Holdings Inc. (DYN) - In the space of the last week the yield on 10-year benchmark treasury notes has fallen by around 15 basis points. At the same time the yield on paper issued by the nation's third -largest independent power producer has risen by as much. Its June 2019 issue carrying a 7.75% coupon has slipped by $6.50 per $1,000 investment at the same time. Dynegy recently announced that it was negotiating with lenders in order to refinance its debt and was making changes to its corporate structure in order to avoid defaulting on its bonds. The yield on this specific issue rose to 14.89% Wednesday widening the spread above the safety of treasuries close to 12%. Dynegy's outstanding maturity of $1.1 billion was actively traded while the yield on its June 2015 maturity rose to 17.14%. The premium to the longer-dated maturity possibly represents a greater perceived risk to the default of Dynegy’s sooner-to-mature bonds.

Levi Strauss (LEVI) – The spread between the denim-maker’s 7.625% May 2020 paper and its benchmark government counterpart remains skintight after the Levi Strauss reported earnings. Net income for the second quarter came in at $21mm through the three-months to May reversing an impaired loss of $14mm in the same period of last year. The company said revenues were stronger across all of its major regions. Bond investors targeted Levi Strauss bonds, which have recently outpaced price appreciation in the treasury market. Investors exchanged around $13mm of the issue making it the second most active on the day behind Dynegy. Since June 27 the premium demanded by investors holding the B2-rated issue has collapsed by around 50 basis points narrowing to 443 pips today.

Muni-Bond Corner – Moody’s credit rating agency put six cities on review for downgrade after losing State Aid in Governor Christie’s recently approved budget.

There has been discussion in the government budget negotiations of eliminating tax exempt bonds. Republican John F. Tierney has introduced tax reform legislation that would require all tax-exempt municipal bonds to be issued where there would be a direct-pay subsidy of 28% after this year. The bill is part of an effort to eliminate certain tax expenditures and sway the deficit-reduction negotiations driving the legislative agenda. Build American bonds were issued as part of the federal bailout and ended last December. This legislation is likely to be heavily negotiated. Munis continue to remain strong today down 1 basis point after falling by between 4-6 pips yesterday. Ten-year AAA benchmark Municipal yields are at 2.66% and that on the 30-year at 4.30%.

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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