Corporate bond activity was somewhat muted even as equity prices staged a strong rebound after the biggest and broadest slump in over three-years. Monday’s slide in government bond yields inspired by a ratings-downgrade for the U.S. government saw demand for corporate paper fall by the wayside and forcing a widening in premiums. The halt to risk-aversion will first need to stand the test of time before bigger decisions are made. But in the hours ahead of the Fed’s widely-awaited statement on Tuesday afternoon, some investors have targeted longer-dated paper issued by quality names causing a narrowing of premiums.
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Investment Grade -
AT&T Inc. (T) – Long bonds issued by AT&T Inc. found strong support on Tuesday allowing a compression of the premium over its government benchmark to 147 basis points as its bonds advanced while Treasury prices fell. The Federal Communications Commission sent a letter to AT&T and Qualcomm Inc., from which the carrier has proposed buying airwaves saying it may review the proposal alongside AT&T's bid for T-Mobile USA Inc. Investors advanced Dallas-based AT&T's shares and September 2040 maturity lowering its yield to 5.18%. In Monday's strong session got treasury debt the gap between the two issues had opened to 159 basis points. AT&T’s 3.35% coupon carries an A2 rating from Moody’s.
Wal-Mart Stores Inc. (WMT) – Shares in WalMart advanced by 2.2% to $50.02 as stocks rebounded and the companied failed to comment on a rumor that it planned to alleviate French retailer Carrefour of its Brazilian division. If successful, the acquisition would boost Wal-Mart from number three in the Latin nation to top-spot. Its longest-dated bonds were in demand Tuesday and even though the yield remained unchanged at 4.75% on its April 2041 maturity, the seven basis point increase in the U.S. long bond saw WalMart's premium slip. Wal-Mart’s 5.625% coupon carries an Aa2 rating from Moody’s.
Muni-Bond Corner – Despite all the volatility and movement in treasuries over the last two trading days 10-year munis were recently trading at an unchanged yield of 2.38%. At Monday’s close this represented 100.8% of treasuries, which is the widest seen since the end of last year. This could bring in crossover buyers or just an outperformance by municipal bonds relative to treasuries from such an overall level of yields. Late yesterday the S&P downgraded several thousand municipal bonds. This included housing securities and debt backed by leases. S&P also cut ratings to AA+ securities backed by Fannie Mae, Freddie Mac and on pre-refunded issues defeased by treasuries and agencies. Top-rated state and local governments wouldn’t automatically lose their top scores, the S&P said. It rates the general obligation debt of nine states AAA. The country’s “decentralized governmental structure” calls for an independent review of state and local government credits, 3.9% of which have AAA ratings, S&P said in a report. Investors will remain cautious and we could see continued outflow out of muni bond funds. Various muni ETFs fell between 1.5-6% in sympathy with equities and over concern about the U.S. downgrade. Yesterday there was an increase in “bids wanted” (bonds put out for the bid by retail) and any buying was in the short end, both of which can be taken as defensive actions. Given the potential downgrades to some state GOs, essential service revenue bonds could outperform GOs. Moody’s dropped Puerto Rico general obligation debt to Baa1 from A3, a day before its Public Building Authority planned issuance of $981mm bonds.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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