Wal-Mart Rising, IOUs Falling Show Weak Economy: Credit Markets

Wal-Mart Rising, IOUs Falling Show Weak Economy
Customers drive through the parking lot of a Wal-Mart Supercenter store in Charlotte. Photographer: Davis Turner/Bloomberg

Wal-Mart Stores Inc. bonds are rallying and short-term business borrowing is falling the most in three months in a sign credit markets are increasingly concerned that the economic recovery is stumbling.

Bonds from discount retailer Wal-Mart gained 3.98 percent this month, the most of the 50 largest issuers in Bank of America Merrill Lynch’s Global Broad Market Industrial index, which has gained 2.28 percent. Commercial paper outstanding fell $23.7 billion in the week ended Aug. 25, the biggest drop since the period ended May 19, according to the Federal Reserve.

Investors are losing confidence that the U.S. can avoid slipping back into recession as a Commerce Department report showed U.S. gross domestic product slowing. Wal-Mart cut prices on cereal, ketchup and detergent this year to lure struggling consumers.

“There’s still uncertainty in the economy, along with a weak employment situation, and that makes Wal-Mart an attractive play for people looking for stability,” said James Goldstein, an analyst at research firm CreditSights Inc. in New York.

Sales of corporate debt in the U.S. plunged this week to $6.39 billion, the least since May, according to data compiled by Bloomberg. Issuance is decelerating even after yields fell to 4.77 percent on Aug. 24, the lowest since record-keeping began in December 1996, according to Bank of America Merrill Lynch.

‘All That It Can’

Federal Reserve Chairman Ben S. Bernanke, in opening remarks to central bankers from around the world at the Kansas City Fed’s annual monetary symposium, said the U.S. central bank “will do all that it can” to ensure a continuation of the economic recovery, and outlined steps it might take if the growth slows.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt rose 1 basis point to 179 basis points, or 1.79 percentage points, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows.

The cost of protecting corporate bonds in the U.S. from default fell, with the Markit CDX North America Investment Grade Index Series 14 declining 1.66 basis point to a mid-price of 112.84 basis points as of 12:48 p.m. in New York, according to Markit Group Ltd.

The index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, ended yesterday at 114.5 basis points, the highest close since July 7. The measure typically declines as investor confidence improves and rises as it deteriorates.

Default Protection

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.

The Commerce Department’s update on gross domestic product showed the U.S. economy grew at a 1.6 percent pace, rather than the 2.4 percent rate calculated last month. The revised increase in gross domestic product was bigger than the median forecast of 1.4 percent from economists surveyed by Bloomberg News.

Bernanke, in his remarks today in Jackson Hole, Wyoming, said “the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”

Spreads on U.S. corporate bonds climbed to 298 basis points as of Aug. 25, the highest in five weeks, Bank of America Merrill Lynch index data show. Relative yields have climbed from 287 basis points on July 27.

‘Pretty Bearish’

“We’re pretty bearish on the economy, but no growth or slow growth for an extended period of time will support the spread levels that we currently have,” said Tim Tarpening, senior portfolio strategist at Pacific Income Advisors, which oversees $4.5 billion in taxable fixed-income assets in Santa Monica, California. “We think spreads can get tighter.”

Bentonville, Arkansas-based Wal-Mart’s $1.5 billion of 3.625 percent bonds due in July 2020 climbed 3.16 cents to 103.925 cents on the dollar this month through yesterday to yield 67 basis points more than Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds dropped 0.97 cent today to 102.96 cents on the dollar, Trace data show.

“We’re pleased that investors recognize our strong balance sheet and strong relative performance,” said Greg Rossiter, a spokesman for Wal-Mart.

Commercial paper outstanding, which typically matures in 270 days or less and is used to finance everyday business activities such as payroll and rent, fell to $1.09 trillion as the slowing economy fails to spark a sustained increase in short-term borrowing. Non-financial company debt outstanding fell $10.4 billion, the most since September, to $149.3 billion.

Jobs Data

“The economy is decelerating and the No. 1 culprit is the jobs situation,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial Inc. in Chicago. “Companies are not hiring because they expect slow demand. Lack of hiring is contributing to slow demand. That’s a negative loop that’s been created.”

Unemployment held at 9.5 percent, near a 26-year high of 10.1 percent, the government said Aug. 6.

Corporate debt issuance in the U.S. declined this week to the lowest since the period ended May 21, when companies issued $5.52 billion, Bloomberg data show. Sales fell 57 percent from $15 billion last week and 69 percent from the 2010 average of $20.8 billion. There were no high-yield bond sales in the U.S. for the first time this year.