BLBG: Bond Yields at 4% Draw Janney, Northern Trust as Sales Hop: Credit Markets
Investment-grade U.S. corporate bonds are attracting investors betting a struggling labor market will help contain inflation after yields rose above 4 percent for the first time since early August.
Yields on debt of borrowers from Bentonville, Arkansas- based retailer Wal-Mart Stores Inc. to computer software maker Oracle Corp. in Redwood City, California, have risen from an average of 3.53 percent on Nov. 4, the lowest on record, as gains in manufacturing and retail sales data pointed to an improving economy, according to a Bank of America Merrill Lynch index that tracks more than 4,400 bonds.
U.S. unemployment, which rose in November to the highest since April, may take five years to fall to a normal level and it’s possible the Federal Reserve may buy more than the $600 billion of Treasuries announced last month, Chairman Ben S. Bernanke said in an interview broadcast yesterday. Rising demand caused yields on company bonds to tighten relative to government debt in the final three days of last week from the widest since Oct. 21.
“The softer economic news actually put a bid in on fixed- income prices,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which has $50 billion of assets under management. “Bonds love the prospects of weakened economic data.”
Spreads Shrink
The extra yield investors demand to own investment-grade corporate bonds rather than Treasuries shrank to 179 basis points, or 1.79 percentage points, as of Dec. 3 from 182 at the end of November as the U.S. reported that the unemployment rate jumped to 9.8 percent, Bank of America Merrill Lynch index data show. The increase in joblessness led to speculation that consumers may temper spending, keeping inflation from accelerating and eroding the fixed-income payments of bonds.
“Investment-grade credit does look attractive here,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc., which last week bought debt issued by American International Group Inc.
Elsewhere in credit markets, spreads on company bonds worldwide widened 5 basis points last week to 176 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Relative yields reached 177 basis points on Nov. 30, the highest since Sept. 8. Yields jumped to an average 3.83 percent from 3.7 percent.
Default Swaps Fall
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 4 basis points last week to 91.5 basis points, according to Markit Group Ltd. The index had gained 5.76 basis points in the week ended Nov. 26.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 2.99 to 106.8, after climbing 8.8 the prior week in the biggest increase since May.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index fell 0.05 cent to 91.76 cents on the dollar, after dipping as low as 91.61 on Nov. 30. Prices on the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, have declined from 92.72 cents on Nov. 9, the highest since May 3. Leveraged loans and junk bonds are rated below Baa3 at Moody’s Investors Service or less than BBB- at S&P.
In emerging markets, relative yields narrowed 12 basis points to 240 basis points, the biggest decline in four weeks, according to JPMorgan Chase & Co. index data.
Investment-Grade Bonds
Sales of U.S. investment-grade bonds rose to $17.1 billion last week, more than the $14.25 billion in the previous two weeks, according to data compiled by Bloomberg.
Westpac Banking Corp. raised $2.5 billion in a three-part offering, the largest U.S. corporate bond sale by a foreign bank in six weeks. The Sydney-based borrower’s $1 billion of 5-year, 3 percent notes rose 0.7 cent from the issue price on Dec. 2 to 100.6 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
AIG sold $2 billion of bonds in its first offering since the insurer was bailed out by the U.S. government in 2008.
The New York-based company’s $1.5 billion of 6.4 percent notes due December 2020 rose 0.7 cent from the issue price on Nov. 30 to 100.45 cents on the dollar, Trace data show. The bond is rated A3 by Moody’s, the seventh level of investment grade, and an equivalent A- by S&P.
Support Prices
European efforts to tackle deficits will also help prevent inflation, helping to support prices from here, according to William Dennehy, senior fixed-income money manager at Chicago- based Northern Trust Corp., which has $150 billion in assets under management.
“We like investment-grade credit at these yields,” Dennehy said, adding Northern Trust was buying newly issued bonds last week.
Fed policy makers on Nov. 12 started a second round of asset purchases to support growth in the economy, reduce unemployment and avert deflation. The Fed has kept its benchmark rate in a range of zero to 0.25 percent for two years.
The Labor Department reported Dec. 3 that the economy added 39,000 jobs in November, fewer than the most pessimistic projection of 87 economists surveyed by Bloomberg News. The median forecast in the survey was for 150,000 more jobs.
Bernanke Interview
“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke told CBS Corp.’s “60 Minutes” program. The purchase of more bonds than planned is “certainly possible,” said Bernanke, 56. “It depends on the efficacy of the program” and the outlook for inflation and the economy.
Corporate earnings are headed for their best annual performance since 1988, with analysts forecasting 37 percent growth this year. They estimate next year will see a 14 percent increase, according to projections compiled by Bloomberg News.
Company bonds should outperform government debt in 2011 as relative yields remain compelling, net sales decline and the securities benefit from the Fed’s quantitative easing, Barclays Capital analysts led by Eric Miller wrote in a Dec. 3 report.
Spreads on high-grade corporate bonds remain wider than the average of about 92 basis points in 2007 before credit markets began to seize up. Returns on U.S. investment-grade debt will beat government bonds by 250 basis points next year, the analysts wrote.
Investment-grade bonds have returned 9.52 percent this year, while Treasuries have gained 6.88 percent, Bank of America Merrill Lynch index data show.
The net amount of corporate bonds issued is forecast to plummet 30 percent as $285 billion of debt, excluding that from U.S. banks, is redeemed, the Barclays analysts said.
“The amount of fixed-income assets available to be purchased next year is going to be smaller,” said Jeffrey Meli, co-head of U.S. credit strategy at Barclays Capital in New York. “This will be one of the most significant drivers of spread performance for investment-grade next year. There’s going to be less paper to buy.”
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
