Banking & Capital Markets

Ardor Cools Ahead of FOMC Meeting

Will Greenspan Sustain the Recovery?
Ed ZwirnJanuary 29, 2001

It looks as if the euphoria, which started when the Fed eased, may have finally played itself out.

The corporate bond market in particular may be seeing the start of a rather contented pause in the record volume which started with the surprise 50-basis point cut more than three weeks ago.

The ardor for bonds, particularly those of the financial sector, may have cooled somewhat. Thursday’s $1 billion J.P. Morgan Chase issue was well-received enough, but spreads for that type of paper began to stagnate afterward.

“The J.P. Morgan Chase issue put a brake on the tightening” that had been seen for that sector, says David Finklestein of Williams Capital Group, noting financials had been outperforming the pack up until that point.

“Maybe [Thursday] the market might have gotten a little heavy in terms of issuance keeping up with demand,” he said last Friday.

But despite the slowdown at the end of last week, corporate bonds scored mostly gains in relation to Treasuries for the week as a whole. Industrials continued their one- to two- basis point per-day daily tightening and financials (as mentioned) outperformed these for most of the week.

The only real weak spot was the utility sector, which has undergone “a lot of skewing due to the California situation,” according to one market source.

This proved to be the case on Tuesday, when Dominion Resources, a holding company for Virginia Electric Power and Consolidated Natural Gas, priced $1 billion of two-year Baa1/BBB+-rated notes to yield 6.038 percent.

While not a catastrophe, the issue yield spread of 130 basis points over Treasuries was some five basis points wider than had been forecast at launch the day before. And this at a time when just about every other type of corporate bond was outperforming Treasuries.

Junk bonds also continue to see a relatively benign environment, with mutual funds continuing to report net inflows for high- yield investment, albeit slower inflows than the immediate post-Jan. 3 period.

50 Basis Points or Bust

Keeping in mind that the record volume of the past few weeks were kicked off by the surprise “intra-meeting” Fed move of Jan. 3, it is hardly surprising that these volumes should ease up at least a bit in the business days immediately preceding the next Federal Open Market Committee meeting, which gets underway on Tuesday.

With reading the tea leaves ahead of each FOMC meeting even more of a pastime than ever before, the early part of the week is likely to see a continuation of this slowdown, as the great bulk of issuers without major fortune- telling abilities prefer to sit sensibly on the sidelines ahead of the highly anticipated Wednesday afternoon announcement by Greenspan & Co.

As for the Chairman himself, the signals he sent out with his speech before the Senate Banking Committee on Thursday gave a rather unambiguous message, at least to debt markets: The Fed will announce an interest-rate cut of 50 basis points on Wednesday.

Any interest-rate move that falls short of this mark will be the moral equivalent of a bomb going off on the corner of Broad and Wall Streets.

Alan Greenspan’s comment that current Gross Domestic Product growth was in the zero area, and that tax cuts were needed “sooner rather than later” were tempered both by cautions against renewed deficits and by disclaimers that he was “speak[ing] for [him]self and not necessarily for the Federal Reserve.”

But the overall tone was dire enough to prompt Treasury futures traders to assume that “the signal” was being sent.

“When [Greenspan] starts talking like that, you know he’s worried,” said one trader of investment-grade debt.

Issuers Wait In Wings

Worried or not, the capital markets are definitely in a holding pattern until everybody feels they can get a clearer read on Fed intentions.

Both investment-grade and junk debt is seeing issuers hold back, at least until Wednesday afternoon. Despite the known intention of firms to borrow further billions in the weeks ahead, there is very little set to price in the coming week for which definite timing is known.

Equities are similarly muddled. Both the Dow Jones Industrial Average and the Nasdaq composite did little more than hold their own last week, and there are no IPOs on the chalkboard for this week.

In investment grade, there are a few issuers said to be interested in peddling debt, but timing remains murky:

Included among these is Northrop Grumman Corp. (Baa3/BBB-), which plans to borrow $1 billion over the coming weeks to help repay financing incurred by its $5.1 percent acquisition of Litton Industries.

In junk, deals on the horizon include Fairchild Semiconductor International, with $200 million of (B2/B) bonds via Credit Suisse First Boston, and Ameristar Casinos (B3/B-), which is expected to hit the market with $300 million to replace bridge loans it took out late last year. Deutsche Bank, which helped Ameristar with the bridge loan, is expected to manage the bond sale.

In terms of equity issuance, there are no IPOs in the definite pipeline for the week, but Ciena Corp. has announced an eight- million share secondary offering, along with $850 million of convertible senior notes. The shares closed Friday at $90.56, about midway in its 52-week range of $30.50 to $149.50.