Demand for a variety of investment grades was evident as investors awaited an after-hours vote in the House presented by Speaker Boehner. The debt impasse won’t rest there and between now and Tuesday’s deadline there will undoubtedly be many nerves frayed. Demand for Wal-Mart’s long-dated 30-year issue was elevated as corporate paper tightened relative to treasury prices.
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Non-Investment Grade –
Boston Scientific Corp. (BSX) – Shares in the nation’s second-largest heart implant device manufacturer surged by the most in more than two-years after the company announced cost-cutting measures and paid down debt early in a tough market. Boston Scientific’s stock gained 10% at lunchtime standing at $7.38 after the company said its second-quarter earnings beat analysts’ expectations while cost-cutting measures amounting to $275mm will cost one-in-20 jobs. Management built on an earlier share repurchase program saying it would now buy back up to $1 billion of its own stock while it also reduced its gross debt to $4.2 billion during the quarter by pre-paying a $750mm loan facility. Investors flocked to outstanding short-dated paper of the emergent, leaner company possibly in hopes that a single-notch upgrade to its currently-rated Ba1paper would lift its standing to investment grade status. The spread to comparable Treasuries narrowed on both its short-dated issues, which were active in the secondary market on Thursday. Boston’s June 2014 maturity advanced sending its yield down by eight basis points while its January 2015 maturity shed nine basis points. In both cases the yield advance was twice that of Treasuries during the session narrowing the premium by about four pips.
Investment Grade -
Kraft Foods Inc. (KFT) – Kraft’s short-10-and 30-year maturities were once again well sought after by investors as the debt impasse at the government drags on. Both its 2020 and 2040 issues, both of which mature in February, were bought by investors looking for lower-ranked paper that might appreciate should corporate bond yields tighten over Treasuries. The 2020 issue carrying a 5.375% coupon advanced by 68 cents per $1,000 invested to 112.10 driving the yield down to 3.70%. So far on Thursday around $90mm face value has traded across both issues.
Muni-Bond Corner – Bank of America won the week’s largest competitive deal, which was the issuance of $418mm general obligation bonds by the state of Maryland rated Aaa/AAA whose yields ranged from 0.70% through 2014 to 3.638% through 2025 maturity. Maryland postponed the sale of $206mm of refunding bonds this week because the state faced risks of placing proceeds in Treasuries, where as we noted in yesterday’s commentary, there stands the risk of a downgrade in the event that lawmakers fail to raise the debt-ceiling. The current 10-year AAA benchmark stands at 2.68% (90.6% of Treasuries) and the 30-year at 4.35% (102.1%). The market remains firm in the short end as investors remain defensive awaiting a debt ceiling resolution. The state of Michigan’s credit rating outlook was revised at Fitch ratings to positive from stable due to prudent budgeting.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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