Yields marked time on Tuesday buffeted by a strong rally for stocks yet underpinned by hopes that the Jackson Hole address by Fed Chairman Bernanke on Friday will maintain downside pressure on yields. Bank of America was at the eye of the latest storm for financial stocks after suggestions that a still-sour mortgage market would require it to raise even more capital in order to survive. Its bonds were active as the yield premium demanded by investors widened out by around 60 basis points.
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Investment Grade -
Bank of America Corp. (BAC) – Two-and-a-half years on from an all-time low of $2.53 for its share price and after comforting investors by raising copious amounts of capital, the bears are once again prowling around Bank of America. Its share price slumped to $6.01 on Tuesday even as bedfellows within the financial sector benefitted from returning optimism for stocks. Risks are rising at Bank of America where options implied volatility is sky-high, while the cost of insurance to protect against losses arising from bonds issued by the mortgage giant rose to a record high. In July the cost of a credit default swap to protect against losses on BofA’s bonds was 178 basis points. Following a slide in its shares the cost today jumped by 47 basis points to 427 basis points. Meanwhile investors shunned the lender’s bonds with its May 2021 issue trading down to less than 90 cents on the dollar hugely underperforming the static performance of its treasury benchmark. Investors exchanged $33mm of its bonds issued three months ago at a 5% coupon. Today the bonds changed hands at 89.50 cents per $1,000 elevating the yield towards 6.5% and 440 basis points over that on the 10-year government benchmark.
BNP Paribas SA. (BNP) – European banking bonds continue to feel the weight of a slowing Eurozone where lawmakers have proved powerless to ring-fence the sovereign debt crisis. French banker Paribas saw its bonds remain out of favor again and were widely exchanged on Tuesday. The 10-year government bond yield added a single basis point on the session to 2.11% while bonds issued by Banque Paribas maturing January 2021 traded down to 99.54 per $1,000 face value lifting its yield to 5.06% and above the 5% coupon it bore when issued in January. Only last week the yield touched its lowest on record at 4.56%.
Goldman Sachs Group Inc. (GS) – Reuters broke the news late on Monday that CEO Blankfein at Goldman Sachs had engaged the services of a prominent defense attorney possibly related to his role at the helm of the investment banker during the housing boom and ensuing credit crisis. And while no charges have been filed, investors responded by slamming the stock and sought protection against potential losses on its bonds. The cost to buy a credit default swap rose by 28 basis points to 283 pips on Tuesday making that the most costly time to insure against default since April 2009. The face value of Goldman’s February 2016 issue took a pounding and by lunchtime in New York became the second most-actively traded bond with total volume a smidgeon shy of $50mm. The yield on its A1-rated debt jumped by 32 basis points on the day to 4.43% and of course widening the spread over treasuries as investors sought a larger cushion. The premium widened out to 232 basis points from 200 on Monday. Goldman’s share price also reversed an earlier gain and recently traded down by 0.2% at $106.35 having put in its lowest price since March 2009.
Muni-Bond Corner – Municipal bond yields are flat to two basis points higher from 10-to-30-year maturities. There appears to be a lot of retail items out for the bid although the market is clearly awaiting direction out of the Federal Reserve on Friday at the annual Kansas City Fed central bank symposium. Citi strategist has been recommending Kicker bonds (which offer high coupons (5%) with short calls (2012-2016) with maturities out to 2025. This bond offers protection in higher rate environments with lower durations. The disadvantages are shorter duration bonds in a declining rate environment underperform, reinvestment risk can be low and premium bonds require more capital. Texas will issue $9.8 billion in short term tax exempt notes today to fund public schools in anticipation of taxes revenues next year. The coupon is 2.50% to yield 0.35bps for one-year debt (12 bps over AAA 1yr).
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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