Corporate Bond Yields Fall But Sentiment Hits 2012 Low
First Published Friday, 1st June 2012 08:41 pm - © 2012 Dow Jones
By Patrick McGee
Of Dow Jones NEWSWIRES
NEW YORK -(Dow Jones)- The usual suspects in the corporate bond world took a hit after Friday's feeble jobs report: bank-bond prices slid, high-yield sold off and a measure of sentiment weakened to its lowest of the year.
Markit's CDX North America Investment Index, a proxy for risk sentiment that shows weakening by moving upward, shot up 2.9% to 127 basis points in late-trading, its highest level of 2012.
But trading was thin overall. Investors were "shell-shocked" after the jobs numbers, according to Guy LeBas at Janney Capital Markets, and most were sitting on their hands until clarity emerges on the macro situation, according to Jason Parker at BMO Capital Markets.
The Labor Department reported that just 69,000 jobs were created last month, versus forecasts of 158,000. Prior months were downwardly revised, too.
Treasurys immediately rallied to fresh all-time low yields within seconds of the report, causing corporate bond spreads to widen on 19 of the 20 most-active bonds. The weakening was led by intermediate-term bonds from J.P. Morgan Chase & Co. (JPM), Citigroup (C), and American International Group Inc. (AIG), where spreads climbed 0.07, 0.08, and 0.18 percentage points, respectively.
But the widening mostly stemmed from the rally in Treasurys--the 10-year yield dropped 0.10 points to 1.467%--rather than a selloff in corporate bonds. Indeed, just five of the 20 most active bonds actually shed value, according to MarketAxess.
BMO's Parker said investors should keep a conservative posture given the escalated risks from Europe, by purchasing bonds from sectors that play a defensive role in a down market. He said he likes utilities and infrastructure, and shuns bank bonds until further clarity on the macro situation emerges, which won't happen for "quite some time."
According to Barclays, the utility sector returned 1.89% in May, versus 1% among industrial bonds and -0.02% among financials. High-grade corporate bonds overall returned 0.75%.
For new issuance, the immediate impact of the May jobs report will be higher concessions on deals next week, said Vincent Murray, head of fixed income syndicate at Mizuho Securities.
Some recently-priced high-grade deals were placed without giving investors any extra-yield, and buyers who mopped them up are now taking a hit. MarketAxess shows Eastman Chemical Co. (EMN) bonds, which were sold earlier in the week, widened 0.02 to 0.11 percentage points in Friday trading, for instance.
"The next set of borrowers will have to pay even larger new-issue concession," Murray said. "However, they are looking at a 10-year Treasury of 1.48%." Low underlying rates from Treasurys should help offset the wider concessions and still entice borrowers to come to market in June.
Borrowers focused on spreads to Treasurys, include foreign or "Yankee" borrowers, and banks, will be less enticed, Murray said.
The holiday-shortened week's tally of high-grade issuance ended at $13.2 billion, in line with expectations and just below the four-week average of $15.6 billion, Dealogic shows.
May issuance just beat expectations with $83.7 billion sold, according to Dealogic. Syndicate desks are expecting $30 billion to $60 billion in June. The lighter issuance should help keep bond prices elevated, particularly with so much outstanding corporate debt expected to be redeemed this month.
According to Barclays, $41 billion of Securities and Exchange Commission-registered, high-grade debt is scheduled to mature this month, compared with $28 billion in May.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; email@example.com