US High-Grade Corporate-Bond Market Volume Hits Weekly Bottom | 6.10.11
US High-Grade Corporate-Bond Market Volume Hits Weekly Bottom
--Weekly high-grade issuance at year-to-date low
--Risk aversion and sovereign-debt woes sideline players
--More M&A-fueled supply expected but at less hurried pace
By Kellie Geressy-Nilsen Of DOW JONES NEWSWIRES JUNE 10, 2011, 12:25 P.M. ET
NEW YORK (Dow Jones)--Weekly issuance in the U.S. high-grade corporate-bond market fell to its lowest level this year, as buyers were bullied by risk, keeping issuers at bay.
Just $5 billion in new investment-grade bonds were sold in the week ending June 10, according to data provider Dealogic.
"Demand is down and will likely remain timid until we get clarity that the economy is merely slowing and not returning to recession," said Anthony Valeri, strategist at LPL Financial.
Last Friday's daunting employment data and sovereign-debt worries overshadowed the corporate market as supply waned and risk premiums were battered in the cash markets.
"Worry over a slowing economy and the fiscal mess are trumping supply and pushing investors into the risk-off mode," said Scott MacDonald, head of credit and economic research at Aladdin Capital Holdings in Stamford, Conn.
Risk premiums on high-grade bonds have widened by 14 basis points from their tightest levels this year. A basis point in one one-hundredth of a percentage point.
"Spread performance going forward will be driven by Treasury yields," according to analysts at J.P. Morgan who anticipate an increase in yields. "Still, we remain neutral given the significant economic uncertainty."
While spreads have widened over the past several weeks, yields on Treasury securities continue to hover near historically low levels. As corporate debt is priced off government-bond yields, that makes U.S. corporate debt less attractive to buyers seeking fatter returns in a higher-risk environment.
"It is very difficult to find any real value in the corporate sector right now," said Bill Larkin, portfolio manager at Cabot Money Management in Boston. While credit metrics remain strong, the bonds simply don't compensate buyers enough for risk, he said.
Analysts at Barclays Capital noted that recent weakness in credit-market sentiment has translated into a noticeable selloff in investment-grade cash and derivative indices.
The CDX.IG.16 index, which investors use as a gauge for risk, traded as wide as 99 basis points on Thursday, more than 10 basis points wide of its late-April tightest level.
"Investors are clearly worried about the slowing economy, and they have every right to be," said Keith Springer, president of Springer Financial Advisors in Sacramento, Calif. Recent disappointing economic announcements have clearly tempered investor optimism, he said.
Still, a need for funding via the debt markets remains for companies involved in merger and acquisition-related activity.
While AT&T Inc. (T) raised $3 billion in funding via the debt markets in April, that is just a dent in its $25 billion price tag for its purchase of Deutsche Telekom AG's (DTE.XE, DTEGY) U.S. cellphone service, T-Mobile.
May was a huge month for industrial issuers, as the sector eclipsed the financial arena volume-wise. According to Barclays, 35% of all fixed-income supply this year has been sold in the industrial sector, while financial issuance comprises 34% of bond sales.
"We'll likely see additional supply in that area, but finding value might still prove difficult," Larkin said. "There aren't bad bonds, just bad bond prices."
A brief poll of N.Y.-based syndicate managers indicates more deals to come, though not at the hurried pace seen during the first half of the year.
"We have several large industrial clients with billion-dollar deals in the wings, which will get finalized as long as rates remain intact and barring any unforeseen geopolitical blow-up," he said.
Others think the combination of risk and the historical summer slowdown could make for sleepy supply, with a stronger return to borrowing in the autumn.
"I'd expect issuance to pick up once again in September as it usually does," Valeri said, noting that, by then, economic data will likely have clarified the health of the economy.
-By Kellie Geressy-Nilsen, Dow Jones Newswires; 212-416-2225; email@example.com
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