Retailer Bonds Pull Away as Time Warner Raises $3 Billion: Credit Markets
July 8 (Bloomberg) -- Craig Johnson, president of Customer Growth Partners LLC, speaks about the outlook for U.S. retail sales. U.S. retailers reported sales gains in June, led by department stores, as record high temperatures on the East Coast pushed more shoppers into air-conditioned malls. Johnson talks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)
July 8 (Bloomberg) -- Michael McNamara, vice president of research and analysis at MasterCard Advisors SpendingPulse, discusses sales by U.S. retailers in June and the impact of stock market and dollar on the sale of luxury items. U.S. retailers reported sales gains in June as record high temperatures on the East Coast pushed more shoppers into air-conditioned malls. McNamara speaks with Margaret Brennan on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)
Retailers, buoyed by sales growing at the fastest pace in four years, are outperforming the U.S. corporate bond market as investors wager the economy will avoid a double-dip recession.
The bonds have returned 2.8 percent since the end of May as the market gained 1.9 percent, according to Bank of America Merrill Lynch index data. Greensboro, North Carolina-based apparel maker VF Corp., the index’s best performer in June, returned 5 percent for the month.
Retail sales expanded at an average monthly rate of 3.8 percent in the first five months of the retail year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said today. Discount retailers such as Wal-Mart Stores Inc. are attractive to investors because consumers are likely to switch to cheaper products if the economy slows, said Payden & Rygel’s Greg Tornga.
“People were out and about, spending money,” said Tornga, head of investment-grade strategy at the Los Angeles-based firm, which has more than $50 billion in assets under management. “They weren’t necessarily spending a lot of money, but it was an improvement over last year.”
Retailer debt returns exceeded the average for U.S. corporate bonds in each of the past three months, Bank of America Merrill Lynch index data show. Retailers returned 3.25 percent in June, compared with 1.89 percent for the market. Bonds from Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, returned 3.61 percent last month. Target Corp. of Minneapolis, the second-biggest U.S. discount retailer, gained 4.2 percent.
Stress Tests
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt was unchanged at 196 basis points, or 1.96 percentage point, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. Yields averaged 3.957 percent.
Derivatives prices are signalling losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by European banking regulators.
So-called recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or debt restructuring. Stress tests designed to gauge banks’ strength will assume a loss, or haircut, of just 17 percent on the bonds, according to two people briefed on the Committee of European Banking Supervisors’ plans before an official announcement.
‘Soft as Butter’
Stefan Kolek, a credit strategist at UniCredit in Munich, said that what the CEBS disclosed about how the tests are conducted yesterday is “fragmental” and “hardly suitable to spark confidence,” while the loss assumptions “look soft as butter.” The EU plans to publish full details July 23.
The cost of insuring against losses on European corporate bonds using credit-default swaps fell to the lowest in two weeks. The high-yield Markit iTraxx Crossover Index declined 23 basis points to 536.2, the lowest since June 22, as of 12:17 p.m. in New York, according to Markit Group Ltd.
Credit-default swaps to insure Greek government bonds fell 10 basis points to 884, according to CMA DataVision. Contracts tied to Spain’s sovereign bonds dropped 16 basis points to 230, Portugal declined 12 basis points to 280 and Italy lost 7 basis points to 167.5.
Time Warner
Credit-default swaps on the Markit CDX North America Investment Grade Index declined 1.47 basis point to a mid-price of 114.8 basis points.
The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and a decline signals an improvement in investor perceptions. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Time Warner Inc., the New York-based owner of the Warner Bros. movie studio and the HBO cable channel, raised $3 billion in a three-part bond offering, its biggest since November 2006.
The company’s $1 billion of 6.1 percent, 30-year bonds yield 215 basis points more than similar maturity Treasuries, compared with the spread of 162 basis points it paid on $600 million of 6.2 percent 2040 bonds issued in March, according to data compiled by Bloomberg.
Bank of America Merrill Lynch cut its forecast for U.S. investment-grade debt sales in 2010 to $700 billion from $800 billion, citing growth in company cash balances.
Most Active
Morgan Stanley, owner of the world’s largest brokerage, was the most actively traded U.S. corporate bond yesterday by primary dealers followed by General Electric Co., Bloomberg data show. The most actively traded junk bond was Anadarko Petroleum Corp. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Fannie Mae, the government-sponsored mortgage guarantor, sold $6 billion of three-year notes, according to data compiled by Bloomberg. The debt yields 23.5 basis points more than similar-maturity U.S. Treasuries, the data show. A basis point is 0.01 percentage point.
The extra yield investors demand to hold emerging-market bonds rather than government notes declined the most in almost a month. The spread tightened 11 basis points to 323 basis points, the most it has narrowed since June 10, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
U.S. retailers reported sales gains in June as record-high temperatures on the East Coast pushed more shoppers into air- conditioned malls.
Nordstrom, Macy’s
June sales at 30 chains rose 3.1 percent after a 2.7 percent gain in May, the 10th consecutive increase in monthly sales, Retail Metrics said today. Analysts estimated a 3.5 percent gain.
Sales at stores open at least a year rose more than analysts projected at Nordstrom Inc., J.C. Penney Co. and Macy’s Inc., according to estimates compiled by Retail Metrics Inc. Gap Inc. and TJX Cos. fell short of predictions.
Discount chains including Costco Wholesale Corp., Target and BJ’s Wholesale Club Inc. also posted sales that trailed estimates. Consumers may be gravitating more toward the dollar stores for discounts, said Ken Perkins, president of Retail Metrics.
“Consumer spending picked up in the first half, and that by itself is very attractive for bond investors,” Lloyd McAdams, chief investment officer at Santa Monica, California- based Pacific Income Advisers, with $4.5 billion of assets under management.
Retailers’ Bonds
The extra yield investors demand to own retailers’ bonds widened 2 basis points since the end of May to 118, as the overall market expanded 9 basis points to 315, according to Bank of America Merrill Lynch index data.
S&P has upgraded 10 investment-grade consumer non-cyclical borrowers this year and cut 8 issuers, compared with 2 increases and 12 downgrades in the same period last year, Bloomberg data show.
Wal-Mart sold $3 billion of debt in a three-part offering on June 30 in its biggest dollar-denominated bond transaction since July 2001, Bloomberg data show.
Wal-Mart, which operates in 15 countries, has benefited from growth in Mexico, Canada and China, as sales declined at U.S. stores amid the worst recession since the 1930s. The company affirmed an earnings forecast on June 4 for second- quarter U.S. same-store sales ranging from a decline of 2 percent to an increase of 1 percent. Comparable-store sales have fallen for four straight quarters.
More Groceries
Target’s $1 billion of 5.375 percent notes due in 2017 have risen 5.77 cents to 114.16 cents on the dollar this year, the highest on record, according to Trace, the bond-price reporting system of Financial Industry Regulatory Authority.
Expanding grocery sections and adding smaller-format stores are priorities at Target, Chief Executive Officer Gregg Steinhafel said during a conference call on May 19. Same-store sales climbed 1.7 percent last month, Target said today in a statement.
VF reported net income of $163.5 million in its fiscal quarter ended April 3, compared with $100.9 million a year earlier, the maker of Lee and Wrangler jeans said in a May 12 regulatory filing.
“These names are higher quality, defensive in nature, naturally outperforming in times of risk reduction and defensive positioning,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc. “Valuations are a bit rich in these names on a relative basis, but they still have defensive qualities that may prove to be of significant value, if it’s going to be a bumpy ride.”
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
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