High-Grade Corporate Bonds Fall Amid Economic Concerns | 11.16.2010
High-Grade Corporate Bonds Fall Amid Economic Concerns
By Kellie Geressy-Nilsen Of DOW JONES NEWSWIRES
NOVEMBER 16, 2010, 4:50 P.M. ET.
NEW YORK (Dow Jones)--Investment-grade corporate bonds fell Tuesday, led by recently sold issues, as growing concerns about the domestic and world economies led investors to opt out of corporate bonds in favor of safer, government-guaranteed debt.
"The combination of higher interest rates and general uncertainty in the world economies right now makes investors abandon all but the safest investments," said Keith Springer, president of Springer Financial Advisors in Sacramento, Calif.
Two recent issues, United Parcel Service Inc.'s (UPS) 3.125% bonds due 2021 and Procter & Gamble Co.'s (PG) 1.8% notes due 2015, both fell as their risk premiums--the extra yield investors demand to own corporate debt rather than Treasurys--increased.
As risk premiums, or spreads, grow, the value of the bond declines relative to Treasurys. UPS sold its issue last week, while P&G sold its deal on Monday. The bonds were the most actively traded issues on Tuesday, according to MarketAxess.
"The investment-grade corporate market is suffering a bit here due to an untimely confluence of events," said Tom Murphy, sector leader and portfolio manager at Columbia Management in Minneapolis.
He said a number of factors--an unusual volume of new bonds recently, renewed concern about European sovereign debt, interest-rate volatility and the recent poor performance of the equity market--have weighed on the bond market.
"New issuance has picked up sharply and, with the exception of a small lull during earnings season, has been elevated since early September," said Anthony Valeri, market strategist for LPL Financial.
"Dealers want to move inventory," Valeri added. "Investors see that and aren't getting too aggressive on taking down new issues. Recent volatile markets have also limited their enthusiasm given improvement in valuations over past few months."
In addition to those factors, Murphy noted that many money managers traditionally decreased their risk profiles as the end of the year approaches.
"Given all else that is going on, this eliminates some of the buy-on-weakness crowd," he said.
Until recently, bonds had almost instinctively risen in value immediately after the company issued them and they began to trade, as buyers who missed out on the initial sale bid against one another in the secondary market.
But that trend seems to have reversed, underscored by the immediate decrease in price, and overall lack of activity. The average daily trade volume was down 11.3% last week, according to MarketAxess.
The decrease in price isn't isolated to new corporate debt. Issues sold previously are also suffering, including Citigroup's (C) 5.375% bonds due 2020, quoted 13 basis points weaker, and General Electric Capital Corp.'s 2.25% issue due 2015, which is 29 basis points wider, MarketAxess reported.
Still, for the time being, borrowing rates remain attractive, and corporate bonds continue to offer investors fatter yields than comparable securities including Treasury and agency bonds.
Prudential Financial Inc. (PRU) sold 30-year bonds Monday that offered a risk premium of 185 basis points over Treasurys. The issue recently traded one basis point tighter.
To be sure, several new issues were on Tuesday's high-grade docket, including a five-year note offering from GATX Corporation (GMT). That issue was sold with a risk premium of 200 basis points over Treasurys, at the narrow end of preliminary price guidance which suggested a 200- to 205-basis-point range.
"That demand for yield will continue to inspire companies who don't necessarily need to borrow to bring new deals," according to one New York-based syndicate manager. "We have been given the green light from a majority of our clients, so it would be safe to say that a good amount of issuance is likely through the end of the year."
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