Bonds were sold throughout the morning with spreads to Treasuries widening in several cases as investors considered how comfortable they were holding paper after the recent yield slump. The tail on the 30-year long bond auction left its scar on the day and doubled the day’s decline in price causing investors to choke somewhat on their recent purchases. The $16 billion auction saw the least demand since February 2009 and at 12.2% of the entire issue the proportion of all-important indirect bidders was the lowest in three-and-a-half years. While a bid-to-cover ratio of 2.08 times means the Treasury could have sold all of its bonds more than twice over, the last longer-dated auction attracted cover at 2.80 times.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis
Investment Grade -
Medtronic Inc. (MDT) – Medtronic’s A1-rated two-year paper was trashed on Thursday and was the most-active of corporate issues by early afternoon. The Fed’s Tuesday announcement that, for the next two years at least, it was effectively putting monetary policy out to pasture caused yields maturing in 2013 to slide to 0.18% at which point they have become pretty-well anchored. As a result Medtronic’s April 2013 tried to play catch-up with its spread narrowing to a 131 basis point premium to its government benchmark. However, some $68mm in trades today meant its new price equilibrium had dictated a premium widening to around 150 basis points with its yield surging to 1.66% while Treasury yields remained welded to the floor. As prices moved lower the face value of a $1,000 investment lost bond holders $4.20 in capital value.
Wal-Mart Stores Inc. (WMT) –The very final maturity on Wal-Mart’s bond inventory list is its April 2041 maturity carrying a coupon of 5.625%. The issue was already pretty active throughout Thursday as it had been earlier in the week. But the disastrous long bond auction caused further losses for Wal-Mart and caused a loss of $6.00 per $1,000 investment as its face value retreated to around $110.00 on Thursday. As the yield on the 30-year government bond surged by 25 basis points on the day, that on Wal-Mart’s own-brand jumped from 4.60% to 4.95% during the session forging a 10-basis point widening of the spread between the two.
Muni-Bond Corner – There is a large dislocation in the muni market between block high-grade trading and limited odd-lot retail support. Retail investors generally take more time to speak with their financial advisors before reacting to market news. Muni bond yields fell by 8-12 basis points across the curve playing catch-up with the slide in treasury yields recently. Ten-year ratios continue to widen, now at 101.8% while the 30-year stands at 106.7%.
Moody’s Investor Services released a special comment saying that municipal issuers are not dependent on market access for critical funding requirements and could manage through a period of tight liquidity without facing a severe deterioration in their credit. Municipal debt, unlike corporate and sovereign debt, amortizes payments of principal over years through the issuance of serial bonds. S&P has no further downgrades on municipal debt until they see what expenditure reductions by congress will be taken.
The downgrade by S&P will not impact Build America Bonds. Those are taxable munis backed by a 35% interest cost subsidy by the federal government. This had raised investors’ concern over a potential default. However, spreads have now widened versus treasuries over the last 2 weeks. On today’s new issuance agenda is an Aa2-rated $311mm deal form Los Angeles Department of Water and Power (Aa2).
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.