Wednesday proved a messy day for corporate bonds after Treasury bulls pulled in their horns in response to the strongest jump in durable goods orders since April. Bonds have risen in response to a global slowdown as demand for safer harbors increased. Yields had been driven to a panic low last week as stock investors threw in the towel over fears that the economy would grind to a halt. Bonds have been further supported on hopes for hints of further stimulus from the Fed this week. The sharp rebound in orders for manufactured goods meant to last beyond three years popped bond-hopefuls’ little bubbles on Wednesday but failed to spark a further surge in equity prices. Government bond yields rose accompanied by a widening in many cases for corporate debt as anxieties grew deeper.
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Investment Grade -
Bank of America Corp. (BAC) – Shares in America’s largest lender improved by close to 9% after analyst Meredith Whitney said that the bank could afford to proceed with capital raising at a pedestrian pace and said there would be “no mad dash.” As concern grew for the company on Tuesday with one story claiming that the bank would be bought before the weekend by behemoth JPMorgan, all manner of red flags shot up. As concerns diminish midweek, so too does the spread over Treasuries on several of Bank of America’s bonds. Yesterday the bank’s May 2021 issue screamed higher to yield 6.5% and although the mid-yield is merely two basis points lower on Wednesday, that’s a better performance than the benchmark note whose yield rose by five basis points to 2.20%.
Caterpillar Inc. (CAT) – A 4% surge in July’s durable goods orders forced a 1.5% rebound for shares of the industrial equipment-maker. Caterpillar’s fortunes reversed throughout the morning before edging ahead to a 0.6% gain at $83.42. Dealers earlier bought Caterpillar’s 10-year issue only to see prices erode as the bond environment weakened. By lunchtime the indicated dealing price in its May 2021 issue carrying a 3.90% coupon carried a mid-yield of 3.15% and a 12 basis point rise on the day. Relative to government securities the issue weakened as the premium demanded by investors widened by seven basis points to 95 pips.
AT&T Inc. (T) – Shares in AT&T shrugged off a Wall Street Journal story that Sprint Nextel would join both it and Verizon in offering Apple’s new iPhone 5 in mid-October. AT&T’s shares reversed losses advancing to a gain of 1% heading for the best performance in three weeks at $29.32. Strong demand was also evident for its bonds maturing in August 2021, where for most of the morning the spread to treasuries narrowed by a couple of basis points as buyers stood behind the issue. Even after treasury 10-year notes responded badly to today’s auction, AT&T’s yield rise lagged the government benchmark carrying a yield of 3.83%.
Muni-Bond Corner – Rhode Island sold $169mm of AA rated general obligation bonds Tuesday maturing in 2021 offering a yield of 2.60%. That represents a 45 basis point premium to the AAA scale. This was a tight spread despite a recent bankruptcy filing of a poor Rhode Island city, Central Falls. Yields are two-to-four basis points higher today for maturities longer than 2017 after a similar move yesterday following treasuries. The market does not trade very well despite the lack of new supply. Buyer apathy could stem from the vacation month of August. It looks like California will come to market around September 20th with a general obligation offering, the first this year as it revaluates financing in the face of a $9.6 billion budget deficit. Spreads to the AAA curve have narrowed from 120 bps earlier in the year to 80 bps currently. We should see spreads widen in the coming months
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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