CREDIT MARKETS: The Elephant In The Room 08/05 04:27 PM
NEW YORK (Dow Jones)--Credit markets were of two minds Wednesday: While they remain open for business, with many companies getting deals done and investors still snapping up government backed securities, doubts linger.
"This bull market is a reflection of improved investor sentiment, a huge amount of cash going to work after sitting on the sidelines, and a very gradually improving economic situation," said Scott MacDonald, director of research at Aladdin Capital Holdings.
But there are serious concerns - from the troubled consumer to deficits.
"In the short term, it is important to stay out of the way of the charging elephant, but in the medium term we'll just have to see how far the elephant can run," MacDonald said.
Investment Grade Corporates
The rally in high-grade credit continued, with investors eager for new debt and risk premiums dropping as a result. On offer for the day was about $3.75 billion in new debt, including $2.5 billion in non-guaranteed notes from Citigroup (C:$3.1205,$-0.0995,-3.09%) .
Citigroup's$2.5 billion five-year notes were offered at a risk premium, or spread, of 380 basis points over Treasurys.
"Relative to other similar Citi bonds trading in the secondary market, the new issue does not offer much in the way of concessions," wrote Byron Douglass at Credit Derivatives Research.
The sale came less than a week after Citi sold $5 billion in bonds guaranteed by the Federal Deposit Insurance Corp.
Citigroup is the second-largest issuer of FDIC-backed debt, behind General Electric (GE:$13.99,00$0.17,001.23%) , according to Dealogic. Since the temporary guarantee program began, Citi has sold $49.6 billion in dollar-denominated FDIC-backed debt and just $6.5 billion in non-guaranteed bonds, not including Wednesday's deal.
Companies lower in the investment-grade scale also took advantage of the window. Mack-Cali Realty (Baa3/BBB) shopped a $250 million 10-year; AGL Capital (Baa1) a $300 million 10-year; and Magellan Midstream Partners (Baa2) offered a $250 million reopening of 6.55% notes due 2019. In addition, Nationwide Mutual Insurance (A3/A-) marketed $700 million in 30-year surplus notes through private placement.
Meanwhile, JPMorgan Chase (JPM:$41.78,00$1.57,003.90%) is offering to buy back $3.4 billion in trust preferred securities in a move that CreditSights analysts say could let the bank book a gain of up to $1.3 billion. The floating-rate securities in the offer are mostly illiquid and the coupons trade in the range of 50 basis points over Libor, said CreditSights.
"We believe that the company's actions may be driven by reverse inquiries from investors and/or opportunity to improve the quality of regulatory capital in light of continued credit losses," they wrote.
The benchmark high-grade derivatives index, the Markit CDX North America Investment Grade IG12, was recently quoted at 111.5 basis points, tighter than its Tuesday close at 113 basis points, according to CMA DataVision.
High-Yield Corporates
The Markit CDX NA High Yield index was virtually flat on the day at 90.5 points early Wednesday afternoon, according to Phoenix Partners Group, which pegs Tuesday's close at 90.75. Investors focused on the job market Wednesday after job data from ADP showed the private sector lost 371,000 jobs last month. All eyes are now on the U.S. government's non-farm payrolls data, due Friday.
"The big question is do things stall at an unemployment rate of 10%, or do we get a true economic recovery over the next two to three years?" said K.C. Nelson, portfolio manager of the Driehaus Active Income Fund.
American Axle & Manufacturing Holding (AXL) bonds moved higher, while the cost of protection on its debt remains at severely distressed levels after the firm's chief executive said its "primary objective" is to restructure out of court, but gave no certainty that its efforts to avoid bankruptcy would pay off. Its 7.875% bonds due 2017 gained 4.25 points, and its 5.25% bonds due 2015 were about 2 points higher, bracketing 40 cents, according MarketAxess. But investors still have to pay $5.5 million upfront plus a $500,000 annual fee to insure $10 million of the firm's bonds for five years, according to Phoenix Partners Group. That's significantly better than at the end of July, when it cost $6.4 million upfront plus the $500,000 annual fee, but it still indicates an acute level of distress.
In the primary market, deals are continuing to come thick and fast.
"We are slowly healing. The credit markets have opened up over the past few months and have given a number of companies a few more years of life," Nelson said.
Iron Mountain announced plans to sell $450 million of senior subordinated notes, while Novelis, a subsidiary of Hindalco Industries Ltd., was in the market with $185 million senior notes due 2015. Inverness Medical Innovations, meanwhile, was expected to price $150 million of senior notes to yield around 8% .
Agency Mortgage-Backed Securities
Mortgages traded much wider in the morning - and held onto those levels - on news that one of the largest sources of Ginnie Mae mortgages, Taylor, Bean & Whitaker Mortgage Corp., has halted its mortgage-lending operations amid allegations by the Federal Housing Administration of irregular transactions that have raised concerns of fraud.
The current coupon spread over a blend of five- and 10-year Treasurys closed 5 basis points wider at 140 basis points, according to FTN Financial.
Deutsche Bank Head of Mortgage Research Art Frank said originators, servicers and leveraged investors were all selling.
"The volumes are not huge, but there's definitely more sells than buys," Frank said.
Agency Debt
Freddie Mac (FRE:$0.80,00$0.19,0031.15%) has sold a $4.5 billion three-year note, according to a person familiar with the matter.
The new 2.125% note, due Sept. 21, 2012, sold at 37.5 basis points over comparable Treasurys.
The issue, CUSIP number 3137EACE7, was priced at 99.959 to yield 2.138, or 37.5 basis points more than three-year U.S. Treasury notes, the agency said. The issue will settle on Thursday, Aug. 6, 2009.
"Orders were easily in excess of $6 billion," wrote Jim Vogel, managing director of agency debt at FTN Financial, in a note to clients. "In small trading so far, bonds have moved at +36 in the secondary."
Joint leads on the deal were JPMorgan Chase, Barclays Capital Inc., and Deutsche Bank Securities, Inc.
Including Wednesday's bond, Freddie has issued $45.5 billion of reference notes securities during 2009 and has approximately $259 billion in reference notes and reference bonds securities outstanding.
Agencies hung onto wider levels from earlier in the day in afternoon trading, with the three-year space leading the way after Freddie Mac priced a new $4.5 billion three-year note.
Freddie 1.75% three-years were 4.5 basis points wider, according to Tradeweb. Other maturities were about 1 basis point wider to Treasurys.
Asset-Backed Securities
The bulk of the deals that emerged ahead of a loan application deadline for a Federal Reserve program have sold, according to people familiar with the bonds.
Issuers including General Electric Co., SLM Corp., Wheels Inc. and First National Bank of Omaha sold newly created bonds backed by loans for education, credit card debt and fleet leases.
The Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, launched in March, offers investors loans at attractive rates to buy newly created asset-backed securities. Over $8 billion in deals surfaced ahead of the sixth loan deadline on Thursday. Last month, that figure was a little over $12 billion and in June it was $16.4 billion.
The slight dip can be attributed to the traditional summer lull, said Jim Harrington, a senior portfolio manager at Ryan Labs Asset Management in New York.
Most of the consumer loan-backed deals sold this year were eligible for TALF, which helped revitalize the securitization market and improved the availability of credit for consumers.
Treasurys
Treasurys got a new lease on life Wednesday after a gauge of the service sector for July unexpectedly weakened, damping optimism about a quick turnaround in the economy.
U.S. stocks sank, spurring flows into low-risk government debt. Bonds were also supported by a bout of Treasury buying from the Federal Reserve. The central bank bought $7.248 billion of Treasurys maturing between December 2013 and August 2015.
Treasurys erased their early losses made from a batch of upbeat data from the U.K. and an announcement from the Treasury Department that it would sell $75 billion notes and bonds next week, a record amount for quarterly refunding. The 10-year note's yield dipped as low as 3.634% from the intraday peak of 3.77% - the highest level since mid-June.
-By Andrew Edwards, of Dow Jones Newswires; 212-416-2228; andrew.edwards@ dowjones.com
(Kate Haywood, Anusha Shrivastava, Min Zeng and Romy Varghese contributed to this report.)
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(END) Dow Jones Newswires
08-05-091627ET
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