Bond Spreads Soar as JPMorgan Goes ‘Underweight’: Credit Markets
The riskiest part of the global corporate bond market is driving relative yields on company debt to the widest levels in more than three months as speculation mounts that the economic recovery is faltering.
The extra yield investors demand to hold bonds rather than government debt widened 22 basis points last week, the most since November, to 305 basis points, or 3.05 percentage points, according to Bank of America Merrill Lynch index data. Spreads on speculative-grade notes soared 54 to 713.
“Every time I look at the high-yield bond market it’s getting sicker,” Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital LP, said May 17 at a conference at Bloomberg LP headquarters in New York. His $24.7 billion DoubleLine Total Return Bond Fund has returned 4.1 percent this year, beating about 95 percent of rivals.
Concern is building that borrowers will have a harder time meeting debt payments as Greece struggles through a political crisis that may see it exit Europe’s common currency and send the euro region into a recession. Retail sales in the U.S. rose at the slowest pace of the year in April and in China, home prices fell in a record number of cities. The global economy may expand 2.27 percent this year, down from 2.83 percent in 2011, according to Bloomberg surveys of analysts.
From the U.S. to Europe and Asia, corporate bond sales are falling, with issuance last week dropping 9.46 percent to $68.9 billion, according to data compiled by Bloomberg. Harland Clarke Holdings Corp., a San Antonio-based provider of checks to financial institutions, Select Medical Holdings Corp. in Mechanicsburg, Pennsylvania, and Toronto-based HudBay Minerals Inc. pulled offerings, all citing market volatility.
“The market’s tone has become decidedly jittery,” New York-based Citigroup Inc. high-yield credit strategists Michael Anderson and Robert Feigenberg wrote in a report last week.
Fixed-income strategists at JPMorgan Chase & Co. said in a report to clients dated May 18 that they expect both investment- grade and high-yield debt to underperform.
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. declined from the highest level in almost five months, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, declining by 2.2 basis points to a mid-price of 121.2 basis points as of 11:29 a.m. in New York, according to prices compiled by Bloomberg. The index ended last week at the highest since Dec. 21.
The index typically falls as investor confidence improves and rises as it deteriorates. Credit-default 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.
Goldman Most Active
The U.S. two-year interest-rate swap spread, a measure of bond market stress, declined 2.1 basis points to 35 basis points as of 11:29 a.m. in New York. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of Goldman Sachs Group Inc. (GS) are the most actively traded dollar-denominated corporate securities by dealers today, with 44 trades of $1 million or more as of 11:30 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Barclays Capital Global Aggregate Corporate Index has lost 1.22 percent this month, paring returns for the year to 3.54 percent.
Relative yields from the most creditworthy to the riskiest borrowers have climbed from this year’s low of 264 basis points on March 20, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield Index. Spreads are at the widest since Feb. 2 following the biggest weekly expansion since the period ended Nov. 25.
Spreads on investment-grade company debt expanded 16 basis points last week to 225 basis points, climbing from this year’s low of 194 on March 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index.
Speculative-grade spreads have reached the widest since February from a 2012 low of 620 basis points on March 19, according to the Bank of America Merrill Lynch Global High Yield Index. Last week’s increase was the biggest since the five days ended Sept. 23.
“The cash market finally saw some real weakness this week as sentiment turned more negative,” Barclays Plc credit strategists led by Jeffrey Meli and Bradley Rogoff in New York said in a research note on May 18.
Record Low Yields
Overall yields ended last week at 4.23 percent. While that’s up from 4.06 percent on May 8, they’re still at about record lows and compare with 8.73 percent at the height of the credit crisis in March 2009.
Companies have taken advantage of a drop in borrowing costs in recent years to refinance debt and extend maturities, bolstering their balance sheets and curbing defaults. Battle Creek, Michigan-based Kellogg Co. (K), the biggest U.S. cereal maker, obtained the lowest coupons in its history when it sold $1.45 billion of three-, five- and 10-year debt last week.
“Good cash flow and receptive capital markets, which are generally allowing companies proactively to refinance maturities and address potential covenant violations, underpin the favorable corporate liquidity position,” analysts at Moody’s Investors Service said last week in a report.
Bond spreads show that investors are starting to wonder whether credit quality has peaked, given the political turmoil in Europe and signs of a slowing economy elsewhere.
Greece, Retail Sales
In Greece, post-election attempts to form a ruling coalition broke down last week, sending Greeks back to the polls next month with surveys giving the lead to an anti-bailout party that would tear up the conditions attached to 240 billion euros ($307 billion) of aid.
In the U.S., consumers took a break from a shopping spree in prior months, as government reports show retail sales gained 0.1 percent in April following a 0.7 percent increase in March.
In China, the National Bureau of Statistics said May 18 that prices of new homes fell from a year earlier in 46 of the 70 cities it tracks.
Corporate bond sales worldwide compare with a weekly 2012 average of $79.5 billion, Bloomberg data show. Sales this month total $198 billion, bringing the year-to-date total to $1.58 trillion. Sales this time last year were $1.6 trillion.
Harland Clarke cited “market conditions” for canceling an offering of $295 million of senior secured notes, the company said in a regulatory filing on May 18.
HudBay discontinued its $400 million sale of notes due 2020 announced last week.
“Although the funding we were seeking was available to us, poor overall market conditions caused the proposed interest rate to exceed our cost of capital criteria,” Chief Executive Officer David Garofalo said in a statement on May 18.
Select Medical terminated its $365 million sale on May 14, saying in a statement that the company “elected not to move ahead with the refinancing due to the rates currently available for the new debt financing in the market.”
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