Buffett’s injection ignites demand for BoA paper

Financial shares were higher after a $5 billion injection in to Bank of America by legendary investor Warren Buffett. Earlier in the week the bank had denied rumors it needed capital but on Thursday inked an agreement with the Sage of Omaha offering him a 6% dividend on perpetual preferred stock. The measure helped underscore confidence in the sector at a time when an acceleration of selling in Europe spooked investors causing more panic selling in New York. Investors quickly jumped back into treasuries driving the benchmark yield nine basis points lower.

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Investment Grade -

Bank of America Corp. (BAC) –Bank of America’s bonds rose across the board with a multitude of issues actively traded after the company announced a capital infusion by Berkshire Hathaway. Only yesterday CEO Moynihan slammed speculation the lender was in need of capital and dismissed a story as baseless that the company was about to be acquired. We’ve been watching growing investor concern translate into surging yields on Bank of America’s debt. Today its bonds advanced sharply and in the case of the May 2021 issue the yield shed around 70 basis points to 5.75% narrowing the gap sharply with treasuries. Notable, however, is the heavy volume across many of its issues. The 10-year deal was most actively sought after as news of Warren Buffett’s $5 billion preferred stock purchase inspired at least a 10% surge in the stock. At least 25 debt issues were actively traded today with volume on the top six deals creating a staggering $250mm in volume by lunchtime.

Walt Disney Co. (DIS) – Disney’s recent 10-year issue maturing August 2021 made a brave effort to compete with the rampant treasury market amid high demand from investors. Indeed a 12 basis point slide in the yield to 3.02% on this A2-rated bond outstripped the gains made by treasuries in increasingly volatile trading forcing the spread to narrow by four pips to 81 basis points. Disney’s shares fell as the overall equity market slumped.

MetLife Inc. (MET) – You don’t become the biggest retailer of variable annuities without building a network, but I’m left wondering whether investors in the nation’s largest life insurer are all together happy about the $18 million per year branding exercise that MetLife just signed up for. Meadowlands Stadium in New Jersey, home to the New York Jets and Giants recently announced that MetLife has bought naming rights for the next 25 years. The whisper is that the annual cost of reminding patrons just who is paying for the floodlighting is $18 million. MetLife’s shares are once again revisiting last week’s 52-week low point while its 10-year bonds underperformed on Thursday. The 4.75% issue maturing February 2021 saw decent volume but the dip in its yield to 4.32% certainly lagged the slide in government bonds.

Muni-Bond Corner – Harrisburg, Pennsylvania, the state’s capital may miss an interest payment on its $3.3mm general obligation bond in September according to the City Mayor. The city faces a $5mm deficit and is trying to arrange a $7.5mm advance for a lease of municipal land. If it doesn’t go through, they could default. They have been in the news in the past year so not necessarily new but….Yesterday, municipal bonds outperformed treasuries as 10-year ratios fell to 99.1% from a recent high over 101%. Today the opposite as the Market is quiet awaiting Bernanke tomorrow.

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.

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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