Treasury yields slide leaving corporate debt lagging

Investors can’t head for the exits fast enough on Tuesday with selling activity picking up even after the Senate approved the debt-ceiling bill to be signed by President Obama. The economic scorecard has been deteriorating gradually of late and some had hoped that a downdraft for stocks would help bolster the appeal of better-valued equities. However, such is the sudden downturn in activity and the prospects for the second half of the year that investors are charging for the exits and putting assets back into the safety of government debt. As a result, corporate paper is being overlooked forcing a widening of premiums over the treasury curve.

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Non-Investment Grade –

Anadarko Petroleum Corp. (APC) – Once again it was Anadarko’s six-year paper maturing September 2017 that led the volume within the non-investment grade sector. By noon volume of $58mm matched that of the leading issue in the typically more appealing investment grade arena. Anadarko’s September 2016 maturity carrying a 5.95% coupon was also widely traded but its volume was just half that of its slightly longer sister. But yields in both maturities rose marginally but notably against benchmark comparisons indicating some investors are perhaps throwing in the towel following a spectacular run for the oil and gas explorer whose shares continue to find support within spitting distance of a 52-week high. While the five-year yield added two pips today to 2.69% and the six-year maturity added one to yield 3.11% government benchmark yields slid by a further seven basis points on economic worries.

Investment Grade -

Wal-Mart Stores Inc. (WMT) – Growth fears, high unemployment, rising savings and a drop in summer spending by consumers can all be found on the shopping list at Wal-Mart whose share price slumped to its least in five-months on Tuesday. Two of the world’s largest retailer’s longer-dated bonds were also in play on Tuesday. Wal-Mart’s July 2040 issue managed to pull its weight alongside a rally in the U.S. long bond while its April 2041 maturity shed 37 cents per $1,000 invested causing its yield to underperform relative to treasuries sending the yield premium higher by six basis points to 87.5 pips. Wal-Mart’s 2041 issue was the most actively traded investment grade issue by lunchtime in New York on volume of $57mm worth of bonds.

Morgan Stanley (MS) – The investment banker’s debt couldn’t keep abreast with the heady pace of decline in the treasury curve on Tuesday where the yield on 10-year government notes slipped by 11 basis points. Accelerated selling in the equity markets left its mark on financial issues with shares in the Financial Select Sector SPDR (XLF) lower by 1.5%. Morgan Stanley underperformed after a recent strong showing and on Tuesday its share price dipped by 2.3% to $21.77. Morgan’s debt prices ground ahead reluctant to participate in the fixed income rally with its five-and 10-year issues most actively traded on total volume of $58mm. As government yields slipped lower the premium on Morgan’s underperforming debt widened by seven basis points at its April 2016 maturity to 233 pips and by the same at its July 2021 maturity.

Muni-Bond Corner – Municipal bonds underperformed U.S. treasuries yesterday with the 10-year AAA tax-exempt scale falling only 4-basis points to 2.63% versus a 12-basis point slide for 10-year treasury note yields to 2.70%. The move aided the appeal of municipal issues by bringing down the ratio to 97.4% making it the most attractive for munis since January. Muni-yields fell mainly in the longer end where deals maturing between 23-30-years fell by six basis points. Moody’s Ratings put outlook on the state of Minnesota (currently an Aa1-credit) on negative watch due to the recent political gridlock saying it was reliant on one-time gimmicks to erase its $5 billion budget deficit. The retail order period for NYC Transitional Finance Authority sale of $900 mm bonds was pushed back to Tuesday on account of the U.S. debt-ceiling agreement. Year-to-date issuance of $125 billion marks a reduction of 50% from last year. Municipal bonds underperformed treasuries in July returning 1.3% compared to 2.11% total return for treasuries. In Tuesday’s market munis yield between 2-6 bps less across the curve.

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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