Treasuries stumbled on Monday in the face of a third-straight charge in equity indices and despite a weaker trend across the tri-state manufacturing sector. Incrementally firmer yields in the government securities market were offset by a mild reduction on corporate names. In the investment grade world, volume was led by financial issues with JPMorgan’s recent 10-year issue leading the most active board with volume of $64mm.
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Investment Grade -
Citigroup Inc. (C) – Not far behind stood Bank of America where strong demand was evident for one of its shorter maturities. Shares in Bank of America, like most financials, were sharply higher in the afternoon and trading 8% better at $7.75. Its originally two-year issue maturing in August 2012 was bid $1.00 per $1,000 face value better pushing its yield down to around 2.75%. Its spread to treasury securities narrowed by 20 basis points to 274 pips.
Non-Investment Grade – Ford Motors (F) –Ford’s recent announcement that it would launch 15 new cars to help boost by half its sales in Asia hasn’t gone unnoticed. Its Bank of America strategist added the company’s shares to its “U.S. 1” list of recommendations partly on account of an effort to expand into Indian and Chinese markets. Ford’s Ba2-rated paper was well-wanted across the yield curve with the leading target among non-investment grade buyers its 7% coupon carrying April 2015 maturity. Investors bought $10mm of that issue while spending another $9mm on its May 2018 maturity. In both cases the spread over treasuries plunged by around 15 basis points as fixed income buyers locked into corporate bonds whose prices they believe offer value above the security of treasuries. There were 15 separate Ford issues where volume exceeded $1mm.
Muni-Bond Corner – Munis outperformed treasuries late last week by 10 basis points at the 10-year horizon. Ten-year AAA munis were unchanged yielding 2.26% (98.3% of treasuries) after a weak 30-year long bond auction. Retail activity was the most active all week as investors get comfortable with lower yields. There are some cheap bargains in the odd lot market as institutional blocks have led the market higher this week. Outflows in muni bonds saw outflows for the third-straight week, totaling $682mm in outflows. Money market tax-exempt funds gained $1.12 billion in new cash in the week ending August 8, recovering most of the outflows from the last week due to the debt ceiling crisis.
Municipal bonds are two-to-four basis points weaker at maturities between 2023-2041 in quiet trading conditions. Thirty-day total visible supply for this week steps up to $7.2 billion and compares to $5.7 billion over the prior week. This week will see $5.4 of issuance land on the table led by $1 billion in revenue bonds from the Indiana Finance Authority Water and Sewer followed by a $980mm deal from California Department of Water.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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