Let the good times roll.
The high-yield slice of the bond market should continue to outperform its better-quality brethren, agency paper and investment-grade debt.
The market for higher grade instruments is still suffering from a classic supply glut. More than $168 billion of corporate debt has been printed so far this year, and this new supply has been overwhelmingly triple-B or better.
Despite this, investment-grade debt outperformed Treasuries throughout most of this time, only starting to back up at the very beginning of February, when the scope of the glut began to hit everyone at the same time new employment figures showed new job growth in January was more robust than analysts had expected.
Last week saw a continuation of the backup of investment grade, with Qwest Communications International’s private sale of $3.25 billion of global bonds achieving mixed results.
Banc of America Securities and J.P. Morgan Chase were lead underwriters on the offering, which is rated Baa1 by Moody’s Investors Service and triple-B-plus by Standard & Poor’s.
The sale itself had been increased by some $250 million, but it came at a price to the issuer. The $2.25 billion 7.25 percent 10-year tranche wound up yielding 205 basis points over Treasuries, a retreat from the 200 points forecast prior to issuance.
Not much of a slip, but slippage all the same.
Even agency paper put in an anemic showing.
Freddie Mac ended last week with an experiment that may have proved that it overstepped itself. Imitating the way Treasuries are issued, the government-sponsored enterprise sold $5 billion of three-year Reference Notes via a Dutch Auction, marking Freddie the first organization outside the Treasury to borrow this way on a regular basis.
Using this mechanism, the issuer takes bids with increasingly higher yields until a level is reached at which purchasers snap up everything. The bonds are then awarded at that level.
In this case, the “stop rate” was reached at 5.266 percent, meaning that the issuer sold the 5.25 percent coupon notes at a discount. Later that day, the issue was reportedly losing ground in secondary trading.
Junk Is Good
But, in the meantime the progress made by junk continues unabated.
Or at least investors hungry for yield seem to think so. Net inflows of cash into high-yield funds amounted to $693.6 million, continuing a trend started at the beginning of the year, reports Katheryn Okashima, director at Merrill Lynch.
According to Okashima, the average spread to Treasuries on a junk bond is now 738 basis points, which is more than 200 basis points tighter than it was at the end of 2000.
“The tone continues to be very good,” she adds.
Slow Week Ahead
But despite the positive outlook for junk bond trading levels, issuance of these more speculative investments is likely to slow down in the coming week, particularly as many issuers and dealers are reportedly huddling in a series of conferences that began last week, kicked off by a Morgan Stanley Dean Witter summit held Feb. 5.
In addition, overall volume for capital markets in general is likely to be muted this week for a number of reasons, starting with a national holiday in Japan on Monday and an early (2 p.m. EDT) close on Friday for U.S. debt markets ahead of the three-day President’s Day weekend.
More significantly, on Tuesday Fed Chairman Alan Greenspan testifies before Congress on the state of the U.S. economy, in the latest in a continuing round of what used to be Humphrey-Hawkins hearings.
Look for the usual from this: Politicians will try desperately to discern meaningful sound-bites from the taciturn Fed chairman, particularly in regard to the debate over the new Bush tax cut plan. In addition, there will be the usual weighing of every word for “tea leaf” indicators of Fed monetary policy intentions.
For the record, Greenspan has already publicly supported the concept of a tax cut.
Given the upcoming events, large-scale bond issuance has a limited window this week, from late Tuesday afternoon through Friday morning, at best.
In investment grade, only one issue in the pipeline is said to be definite for this week:
Noranda, a Canadian mining concern, plans $300 million of (Baa2/BBB) bonds via Goldman, Sachs. The issue will replace debt maturing in 2002 and 2003.
Other large issues with less definite timeframes include:
Highlights of junk issuance in the weeks ahead include:
In the equity IPO market, issuers are hoping that KPMG Consulting’s successful offering last week will jumpstart this sector.
At this point, it looks like only three issues are likely to be priced this week.