Investors Pull Back, Stop 7-Week Rally In Corporate Bonds
15 Maio 2009 - 4:39PM
Dow Jones News
Risk premiums, or spreads, on corporate bonds have widened this
week as investors stepped back from the market, ending a seven-week
winning streak as more companies continued to raise debt and
economic data came in weaker than expected.
Large bond sales from Microsoft Corp. (MSFT), the largest
software maker in the world, and Wal-Mart Stores Inc. (WMT), as
well as casino operator MGM Mirage (MGM), helped companies sell
more than $34 billion of debt this week. That's down from over $43
billion the previous week, according to data provider Dealogic, and
investors showed a familiar reluctance to pony up huge chunks of
cash for corporate bonds in a bid to boost returns.
"There is no question that the credit crunch has been somewhat
alleviated...But it's still a tremendously fragile market and
accounts are well aware of it," said Richard Lee, managing
director, fixed income trading, at Wall Street Access, a
broker-dealer in New York.
"Spreads have tightened dramatically over the past few weeks to
the point that some participants feel the risk reward is not worth
investing," he added.
The rally in both high-grade and high-yield corporate bonds had
pushed the yields over risk-free Treasurys that investors demand to
buy such debt to their lowest level in eight months.
This week, weakness set in.
Risk premiums on highly rated corporate bonds stood at 6.02
percentage points as of May 14, according to data from Merrill
Lynch. That's wider than 5.96 percentage points at the end of last
week, but still significantly lower than the end of 2008 when risk
premiums topped eight percentage points. At 5.96 percentage points,
risk premiums were the lowest since early October last year.
Risk premiums on junk bonds meanwhile stood at 12.91 percentage
points Thursday compared with 12.54 percentage points on May 7,
according to Merrill's U.S. High Yield Master II index.
Investors might be becoming more selective, but all-in borrowing
costs remain low, according to Michael Davidson, head of debt
capital markets for the Americas at UBS in New York.
"The market has come off a little bit in the last week but it
remains open for high-quality issuers and they are still getting
deals done at attractive rates," Davidson said.
As such, he's not concerned about the slight sell-off.
"Spreads had come so far so quickly, so it's only natural that
the market should come off a little bit," Davidson said.
That said, this week's economic data hasn't helped.
Initial jobless claims rose by 32,000 to 637,000 last week and
retail sales dropped unexpectedly in April.
"Things haven't miraculously gotten better over the last month
and a half, there are still some major issues that need to be
worked out...," Lee said.
Even so, JPMorgan analysts expect issuance to remain robust due
to lower all-in-financing costs and non-guaranteed issuance from
banks looking to repay money lent to them under the government's
Troubled Asset Relief Program, or TARP.
The rally could stall in the near-term, but "both technicals and
fundamentals remain supportive of lower spreads and yields",
according to the analysts.
But as Lee points out: "The market...is still being artificially
propped up by the Fed. When the Fed takes the training wheels away,
what will happen then?"
-By Kate Haywood, Dow Jones Newswires; 201-938-2348;
kate.haywood@dowjones.com