Bernanke Anxieties Embodied as Bond Sales Tumble: Credit Markets
Sales of corporate bonds from the U.S. to Europe and Asia slumped to their lowest levels this year and borrowing costs soared to the most since February as a global slowdown curbed demand for all but the safest assets.
Deere & Co. (DE), the largest maker of agricultural equipment, and Springdale, Arkansas-based Tyson Foods Inc. (TSN) led weekly sales of at least $39.5 billion, the smallest amount since the five days ended Dec. 30, according to data compiled by Bloomberg. Offerings fell below the 2012 weekly average of $76.8 billion for the fourth consecutive period as yields rose to 4.272 percent from the low this year of 4.06 percent on May 8.
High-yield issuance in the U.S. was virtually shut as Federal Reserve Chairman Ben S. Bernanke said the world’s largest economy is threatened by Europe’s debt crisis and government budget cuts, making it harder for corporate borrowers to meet their obligations. China reduced its benchmark interest rate for the first time since 2008, stepping up efforts to combat a deepening slowdown.
Borrowers and underwriters are in a state of “prudent hesitation,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said in a telephone interview yesterday. “We had a week of elevated concern about the path of the U.S. and global economy and, of course, we continue to worry about the European prospect.”
Yields on corporate bonds increased to the highest since Feb. 21, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield index. The extra yield investors demand to hold the debt rather than government debentures expanded to 314 basis points, or 3.14 percentage points, as of June 6, from this year’s low of 264 on March 20. That means an issuer would pay an extra $500,000 a year on every $100 million of debt borrowed.
Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. rose for a second day, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increasing 0.7 basis point to a mid-price of 122.5 basis points as of 10:58 a.m. in New York, according to prices compiled by Bloomberg.
The index, which has climbed from an almost one-month low of 93.8 on May 2, typically rises as investor confidence deteriorates and falls as it improves. 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 U.S. two-year interest-rate swap spread, a measure of debt market stress, declined 0.29 basis point to 31.31 basis points as of 10:59 a.m. in New York. The gauge, which has dropped from a four-month high of 39.13 on May 15, narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of Fairfield, Connecticut-based General Electric Co. (GE) were the most actively traded dollar-denominated corporate securities by dealers, with 164 trades of $1 million or more as of 11:01 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Securities of ATP Oil & Gas Corp. (ATPG) slumped by the most since they were issued after the driller’s new Chief Executive Officer Matt McCarroll resigned a week after being named.
ATP’s $1.5 billion of 11.875 percent notes maturing in May 2015 dropped 12.4 cents to 45.5 cents on the dollar to yield 49 percent at 10:50 a.m. in New York, according to Trace. That’s the biggest fall since the bonds started trading in January 2011 and the lowest price since the debt was issued.
McCarroll resigned after failing to reach an employment agreement with the company, according to a statement yesterday from ATP. He was named to the position June 1.
Time Warner Inc. (TWX) plans to raise $1 billion in a two-part offering eight months after the owner of the Warner Bros. movie studio sold similar-maturity bonds at its lowest coupons on record, according to a person familiar with the transaction who asked not to be named because terms weren’t set.
High-yield bonds in the U.S. have lost 1.2 percent since the end of April, paring the gain for the year to 4.9 percent, Bank of America Merrill Lynch index data show.
Global bond offerings fell almost 25 percent from last week’s $52.8 billion, Bloomberg data show. This year, sales of $1.73 trillion have fallen behind the $1.8 trillion pace for the same period in 2011.
Sales in the U.S. of $15.4 billion of bonds almost matched last week’s volume. Speculative grade issuance included a $152 million add-on offering from Fifth & Pacific Cos. (FNP), formerly known as Liz Claiborne, on June 6 and a $165 million sale by Norbord Inc.
American Casino & Entertainment Properties LLC canceled a $310 million junk-bond sale as Europe’s escalating debt crisis curbed investor appetite for risk and drove speculative-grade borrowing costs to a five-month high.
Some investment-grade issuers chose to issue perpetual preferred shares, including $2.25 billion from General Electric Co.’s financing arm and $250 million from Public Storage.
“We’re definitely seeing a lot more higher-rated names tap the market versus lower-rated,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview.
Investors are hesitating to commit large sums to either government or company bonds amid abrupt market moves.
Benchmark 10-year Treasury yields rose to 1.57 percent from a record low of about 1.45 percent on June 1 and down from this year’s high of 2.38 percent on March 19, Bloomberg data show. The volatility has caused investors to step back, said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts.
“When you’re looking at historically low yields, you have to be very, very careful,” Larkin said. “When it feels like the economic environment is getting more stormy, it’s wise to be very cautious. Especially when interest rates are this expensive.”
Yields on U.S. corporate bonds rose to 4.39 percent, a 4 basis-point increase from June 1 and above this year’s low of 4.18 percent on May 8, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master index. In Europe, yields have risen to 3.36 percent from this year’s low of 3.15 percent on May 8.
Deere issued $1 billion of 2.6 percent, 10-year notes that yielded 105 basis points more than similar-maturity Treasuries and $1.25 billion of 3.9 percent 30-year bonds with a 130 basis- point spread on June 5, Bloomberg data show. The coupons were less than previous lows set Feb. 22 for 10-year debt and in October 1998 for 30-year notes, the data show.
Tyson sold $1 billion of 4.5 percent, 10-year notes at a spread of 290 basis points on June 6, Bloomberg data show. The coupon was less than the 6.125 percent low set in January 1996 for the company’s 10-year debt, the data show. Proceeds will be used to refinance the company’s $810 million of 10.5 percent securities due March 2014, Tyson said in a June 6 statement.
“We’re very pleased with the transaction, since it improves our financial flexibility and reduces our ongoing interest costs,” wrote Gary Mickelson, spokesman for Tyson, in an emailed statement. Moody’s increased Tyson’s long-term debt ratings, including a one-level raise of its senior unsecured guaranteed notes to Baa3, the ratings company said in a release.
“Even if they have cash, people are hesitant to buy,” said Sabur Moini, a money manager who helps oversee about $2.5 billion of high-yield assets at Los Angeles-based Payden & Rygel, in a telephone interview. “Issuers don’t want to pay a lot, dealers don’t want a deal that gets hung out there, so all parties are in standoff-ish mode.”
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said yesterday in testimony to the Joint Economic Committee in Washington.
The Fed chairman urged lawmakers to put fiscal policy on a “sustainable path” while avoiding a “severe tightening” in spending just now that could hamper the economic recovery.
German Chancellor Angela Merkel toughened her opposition to euro-area debt sharing in a statement through a spokesman on June 4. Euro bond-type options are only conceivable after a process of European integration lasting “many years,” Merkel’s chief spokesman, Steffen Seibert, said. The statement was made in response to Spanish Prime Minister Mariano Rajoy’s pleas that Germany consider new ideas to resolve the debt crisis.
“What spooks most people is the, so far, inability, after a couple of years of working groups, for Europe to come up with a fully acknowledged plan to address all of its current problems,” Malvey said.
In the U.S., manufacturing orders unexpectedly fell in April for a second month, with bookings dropping 0.6 percent, figures from the Commerce Department showed on June 4 in Washington. The last time bookings decreased in consecutive months was in February and March 2009.
The U.S. economy grew at a 1.9 percent annual rate in the first quarter after advancing at a 3 percent pace in the last three months of 2011.
Employers in the U.S. added the smallest number of jobs in a year in May, stoking concern that the economic recovery is faltering. Payrolls increased by 69,000, below median estimates of 150,000, while the jobless rate rose to 8.2 percent, according to Labor Department figures released June 1.
China cut borrowing costs for the first time since 2008, with the one-year lending rate dropping to 6.31 percent from 6.56 percent, and loosened controls on banks’ lending and deposit rates, in what UBS AG called a “milestone.” The announcement, which came before China was scheduled to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.
“There are all sorts of things being talked about that makes the bond market very dangerous right now,” Larkin said. “It makes it very difficult to buy bonds in this environment.”
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