Corporate bonds rebound as fear still rules the day

IB Corporate Bond Brief: New Issues Continue to Find Strong Demand

Early morning appetite for stocks has worn thin. Dealers are pinning their hopes on a Friday speech in Wyoming’s Jackson Hole to be delivered by Fed Chief Bernanke at which he’ll at least allude to another economic stimulus program. Yields had risen earlier as investors’ fear gauge dipped, but demand for fixed income fast-picked up as stocks teetered on losses by around lunchtime. And while volume was possibly lighter than usual, investors were keen to buy recently issued corporate paper while for their part, issuers were happy to take advantage of the recent slide in yields.

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

INVESTMENT GRADE:

The Walt Disney Company (DIS) – Having watched its shares fall to a fresh 52-week low in light of growing signs that the consumer is cash-strapped and unemployment remains high, Disney last week issued a 10-year tranche totaling $750mm carrying a 2.75% coupon. The issue on Monday fell in price terms lifting its yield to a midpoint at around 2.95% from 2.88% at last week’s close. That compares to a four basis point rally in benchmark government notes to a yield of 2.10%. With volume in Disney’s new 10-year issue at $31mm by Monday lunchtime its latest issue appears well-timed and still finding interest among buyers of corporates.

Pepsico Inc. (PEP) – The not insignificant spread in longer-dated bonds issued by the world’s largest snack-maker make it difficult to paint a full picture of the day’s trading. Demand for its near-30-year issue took it to the top of the most-active by volume leader board Monday with $43mm of its notes changing hands. Pepsico’s $750 million issue carries a coupon of 4.875% and was originally issued in October to mature October 2040. You can tell from the near $10-spread between bid and ask that this issue is not necessarily well traded. In terms of yield, the spread represents a quote of 4.25% to 5%. It appears that chunks of $5 million are trading when they become available with institutions the likely buyer. Pepsico last week announced the issuance of three-and-10-year paper claiming the proceeds were to be used for general corporate purposes. At a midpoint yield of 4.625% its bonds are trading at 132 pips above the U.S. long bond.

The Progressive Corp. (PGR) – Demand for bonds issued last week by personal and commercial auto-insurer Progressive Corporation remained firm despite a hiccup for treasury notes Monday. At the end of day one for the property and casualty insurer’s August 2021 bonds when issued last week the 3.75% coupon yielded 153 pips over the U.S. 10-year note. Around $25mm of the Progressive issue changed hands to start the week pushing its yield down to 3.60% to yield 150 pips over notes as some investors appear keen to add the A1-rated bonds to their books.

MUNI-BOND CORNER:

Thirty-day total visible supply remains low at $5.4 billion having climbed to as high as $12 billion in July. This week only $3.7 billion is expected to be sold marking a downturn from last week’s total of $6.3 billion. Issuance is expected to pick-up after Labor Day in two more weeks. The large deals this week are $452 million by San Francisco Airport Commission while King County Washington will sell $403 million in sewer revenue bonds.

AAA 10-year yields fell to 2.15% last week marking a record lows. Retail investors have been better sellers at these low yield levels. U.S. municipal bond mutual funds last week saw net withdrawals of $682 million for the fourth consecutive week, according to Lipper U.S. Fund Flows. State of Alabama issuer costs have increased recently due to the impending Jefferson County municipal bankruptcy. The county has delayed the decision to try to settle with creditors. 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.

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.

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