S&P downgrade pushes traders into Treasuries

IB Corporate Bond Brief: Corporates washed-out as bond funds forced to add Treasuries

The best-laid plans of mice and men didn’t necessarily play out too well in the corporate bond space after Standard and Poor’s took back a letter from Washington. Any rationale mind suspicious over a possible U.S. downgrade ahead of the weekend might have sold government debt for fear Treasuries would be expelled from dealers’ portfolios. However, on account of portfolio criteria determining portfolio concentration, corporate bond traders were forced to act in a perverse manner in response to the downgrade. Sellers tossed lower-rated bonds out after the market opened on Monday to make way for guess what? Yup. More Treasuries!!

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis

INVESTMENT GRADE:

Barclays Bank (BACR) – ADRs in London’s Barclays Bank slumped by 9.4% as U.S. stock prices followed Europeans lower. So-called Yankee bonds were badly affected, representing borrowers based outside wanting to tap the U.S. capital market. Many corporates were ditched to make way for the required increase in concentration of U.S. treasuries but Yankee bonds, especially with banking ties, suffered more than most. Portfolio managers had to shuffle their hand and decide what to throw out as the new rule requires a greater concentration of AA+ rated bonds. That meant choosing which bonds to ditch in order to add more treasury notes and bonds. About $60mm of Barclays bonds traded at two maturities. Most active was its May 2019 maturity where investors marked down the price by $1.40 per $1,000 investment while selling was slightly more aggressive at the January 2020 issue where investors slide $3.00 per $1,000 bond off the value. However, given that portfolio managers have been holding onto corporates for so long it’s unlikely that despite today’s apparent bloodbath for corporates that many lost money on the selling.

Vale (VALE) – A jump in the long-bond driving 17 basis points off the cost of government borrowing for 30-years didn’t help investors in the world’s biggest iron-ore producer. Its shares sank by almost 9% to $25.50 as part of the broad market selloff on Monday and as its chief marketing and sales officer correctly noted, trying to predict the price of iron ore for 2012 is no easy feat. That, he said, depends largely on how Asian demand pans out in response to U.S. and EU economic deceleration. Bonds issued by Vale maturing in November 2039 fell widening the premium investors demand over and above treasuries out to 197 basis points from 183 on Friday.

MUNI-BOND CORNER:

After making such a great job of downgrading the U.S. sovereign rating S&P will address the ratings of many municipal issuers Monday. The agency is likely to downgrade ratings on pre-refunded bonds (tax-exempts backed by U.S. governments and agencies). Bonds with direct backing by the U.S. government, such as housing bonds, could face downgrades. Moody’s on July 13 said a possible U.S. downgrade would affect 7,000 municipal credits totaling $130 billion that are directly linked to U.S. credit. Moody’s also put five of the 15 states it grades Aaa on review for a potential downgrade because of their vulnerability to cuts in federal spending. The company wound up reaffirming those top ratings last week, assigning a negative outlook. It should take a few weeks, possibly more, for the municipal market to evaluate how individual credits should be priced in a new environment where the federal government is no longer rated AAA. Thirty-day total visible supply of $5.1 billion includes only $2.3 billion in expected offerings for this week. The largest deal this week is $225mm of revenue bonds from Puerto Rico Public Buildings Authority. Ten-year AAA yields closed unchanged on Friday at 2.38% versus 2.49% for 10-year treasuries (95.6% ratio). U.S. Municipal Bond Mutual funds had outflows of $861mm in the last week. For live corporate bond pricing and current inventory please see Bloomberg page IBCO.Customers can access Interactive Brokers corporate bond offering through their Trader Workstation platform. For clients wanting more market color or inventory details please contact Jesse Muscarello in the New Jersey office at 201-946-5431. For municipal bonds please contact John Gallagher on 203-422-3621.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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.

Comments
comments powered by Disqus