CREDIT MARKETS: BP Bonds Rally While Weak Data Boosts Safety

16th Jun 2010 22:29

By Chris Dieterich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The debt markets opened on a neutral tone Wednesday on worse-than-expected housing-start data, but added some vigor in the afternoon after a top fixed-income chief endorsed the purchase of debt issued by BP PLC (BP, BP.LN) and traders snapped up the oil giant's bonds. Investors drove up prices for Treasurys on renewed demand for safety. Several new issues came to market in the investment-grade space, and the high-yield primary market was quiet. Junk bonds traded higher on the day. Markets remain fragile, both on the new issue side as well as in secondary trade. "We're trying to deal with what the market's giving us, to buy during the dips and trade out in a rally," said W. Frank Koster, chief investment officer at Dwight Asset Management. Koster said he remains overweight on corporate credit but less so than a month ago, and expects the new-issue market to remain "very sloppy" for the near future. Investment Grade Investment-grade issues continued to trickle into the market. Prudential Financial Inc. (PRU) launched a $1 billion issue in two parts, a $650 million 10-year issue and a $350 million 30-year issue. Western Union Co. (WU) priced a $250 million 30-year issue, and R.R. Donnelley (RRD) announced a $300 million issue of 10-year notes. U.S.-marketed investment-grade issuance is picking up somewhat this week. So far, $6.6 billion worth of issues have come to market, already more than the $6.1 billion total from last week, according to Dealogic. The running total for June issuance is $16.2 billion. Any near-term buoyancy in the credit markets will hinge on the continued stabilization of all markets, said Derrick Wulf, a portfolio manager at Dwight Asset Management. A strong showing for stocks for two consecutive days combined with no major bad news regarding sovereign debt in Europe are spurring investors to risk, he said. But corporate credit investors remain pinned to headlines, generally abandoning long-view decision-making in favor of breaking-news trades, he said. Many issuers will remain on the sidelines until some semblance of stability returns. "There are a decent amount of high-grade issuers that would be looking to come to market should they view [conditions] as more favorable," Wulf said. "We like corporate credit...and will look for opportunities to add in right names at right levels" when they hit the market. BP made a splash in the secondary market, as bond yields fell Wednesday afternoon as demand surged after Bill Gross, co-investment chief for Pacific Investment Management Co., said his firm recently began buying one-year bonds issued by BP. "At this point, if you can get 10% for one-year paper on BP, we think it's closer to double-A than triple-C" in terms of debt quality, the Pimco executive said on CNBC. "That's a significant value and we've started to buy some." The Markit CDX North America Investment Grade index, the benchmark U.S. credit default swaps measure, tightened as the day progressed. The CDX was trading at 117.4 basis points as of 4:30 p.m. Wednesday, compared with 118.7 basis points at Tuesday's close, according to Markit. High Yield Junk bonds traded higher Wednesday, carrying forward some residual upward momentum from Tuesday. "People have cash to put to work and things definitely look cheaper than they did two weeks ago," said Scott Grzankowski, a high-yield analyst at KDP Investment Advisors. Cash bonds were firm to slightly higher, while the Markit CDX North America High Yield Index gained 0.7 point to 96.35, according to Markit. The primary market was relatively quiet. The only new deal to sell was a $250 million five-year offering from TitleMax Inc., with the notes pricing via Jefferies to yield 13.5%, according to IFR, in line with earlier price guidance. With an unprecedented sum of corporate bonds and loans maturing the next four years, some lower-rated speculative-grade companies may find it difficult to refinance at the rates they'll need for long-term survival, provided they can find financing at all, Standard & Poor's said Wednesday. S&P said the biggest risks to credit availability for U.S. speculative-grade corporate borrowers are the effects of sovereign credit crises in Europe, and that the resulting risk aversion is especially problematic at a time when U.S. nonfinancial corporate borrowers face more than $1.7 trillion in bonds and loans maturing in the next four years. "We believe that many borrowers at the low end of the ratings scale will encounter serious hurdles to their refinancing needs in 2013 and 2014," said S&P's John Bilardello. "Unlike investment-grade entities, for which the main issue is the rising cost of capital, speculative-grade borrowers may find that financial institutions and investors are wary of lending to them." Junk-bond issuance reached record levels in March and April, but backed off sharply in May and has been slow to revive in June. As this wave of refinancing nears, S&P said it expects the proportion of debt in the speculative-grade category--debt rated BB+ and lower--to continue to grow. The amount of speculative-grade debt coming due next year accounts for about 41% of the total, on a dollar basis. That percentage grows to 46% in 2012, climbs to 58% in 2013, and jumps to 72% in 2014, S&P said. Assuming that economic conditions continue to improve, S&P said that comparatively strong speculative-grade companies will find ways to refinance their debt. At the same time, many of those rated B- or lower may not, depending on conditions in the credit markets. Asset-Backed Securities Bank of America Auto Trust's auto-loan-backed deal priced Wednesday, according to a person familiar with the matter. The bond was increased in size to $1.252 billion, up from an original $1.002 billion. The self-led deal has four tranches, of which the largest, worth $481 million, sold at 20 basis points over Eurodollar synthetic forward, or EDSF, a benchmark. Also Wednesday, Ally Auto is in the market with a $792.3 million auto loan-backed deal, according to a person familiar with the matter. The bond, dubbed ALLYA 2010-2, has six tranches and is joint led by JP Morgan, Deutsche Bank and Royal Bank of Scotland. Pricing is expected by Friday. EFS Volunteer LLC is also offering a $227.9 million student-loan-backed deal via the private-placement market, according to a person familiar with the deal. The deal is led by Morgan Stanley. Mortgages Agency mortgages were firmer, and little affected by the delisting of Fannie and Freddie. Demand and lack of supply of agency mortgage bonds are holding risk premiums firm on these bonds, said Mustafa Chowdhury, head of rates strategy at Deutsche Bank. Risk premiums are 1 basis point firmer at 138 basis points over comparable Treasury yields. Federal regulators' decision Wednesday to remove shares of Fannie Mae (FNM) and Freddie Mac (FRE) from the New York Stock Exchange and have them trade on an electronic bulletin board marks a fundamental change for the two mortgage agencies now that they are operating under conservatorship. The conservator, the Federal Housing Finance Agency, said the move was a result of both companies trading around $1 for more than 30 days. "It's a formality," said Todd Abraham, a portfolio manager at Federal Investors Inc. "It's surprising that it didn't happen before." Freddie Mac's shares haven't closed below $1 since Aug. 7, 2009, though they have hovered around the $1 level, while Fannie's have closed under $1 every day since May 19. Freddie was recently down 40% at 73 cents, while Fannie traded 38% lower at 57 cents. Other market participants, however, said they saw the move as a clear message, for anyone still in doubt, that Fannie and Freddie are government tools for fixing the housing market, no longer independent companies that can be traded for their worth. "The delisting isn't a signal of where [the government] wants to go with Fannie and Freddie as it is disabusing people of the idea that they are independent entities," said Jim Vogel, agency strategist at FTN Financial. Treasurys Treasury prices posted moderate gains Wednesday, snapping a two-day losing streak, as concern over the economic outlook bolstered demand for safe assets. As of 4 p.m. EDT, the price of the 10-year note was 14/32 higher, with the yield down 5.2 basis points at 3.258%; the 30-year bond 28/32 higher, with the yield down 5.0 basis points at 4.180%; and the two-year note 2/32 higher, with the yield down 2.8 basis points at 0.734%. Bond yields move inversely to prices. Demand for Treasurys was strongest in early morning trade, driven by renewed worries about the euro-zone's debt problems and poor U.S. housing data. The rally eased in the afternoon session, with prices way below the best levels of the day, as the U.S. equity market recovered from early losses to trade little changed. Treasury prices hit session highs following the release of data showing that U.S. housing starts plunged in May, the month after the government ended its home-buyer tax credit program. This raised concerns that the struggling housing market would be a drag on the U.S. economic recovery in the second half of the year. (MORE TO FOLLOW) Dow Jones Newswires June 16, 2010 17:29 ET (21:29 GMT)