Junk issuers who have already filled up the calendar with more than $4 billion of bonds set to price in the coming week or weeks must have felt the ground shift on Friday.
Economic statistics released at the end of last week show declines in both capacity utilization and industrial production, with both figures at their lowest level in years.
With this latest sign of economic weakness, much of the betting is shifting again to another 50 basis-point rate cut when the Federal Open Market Committee announces the results of its two-day session June 27.
The immediate upshot was a rally in Treasurys, with the 10-year indicated at a yield of 5.21 percent as of late Friday afternoon.
While the latest numbers are bond-friendly, they also point the way toward increased volatility during the coming week, especially given that Fed watching is likely to become a bigger factor than usual, given the timing.
Of the data releases scheduled for this week, none are expected to be blockbusters, with the possible exception of Tuesday’s housing starts numbers, with anything weaker-than-expected setting off a major flight-to-quality and any other result muddying the waters.
In the meantime, capital markets as a whole are achieving mixed results.
The initial public offering for Kraft Foods , which opened for trading Wednesday at $31.50, was probably judged a success by the issuer and deal managers because it came in higher than the forecast for $27 to $30.
But with the stock hovering in the $30 area at the end of the week, those hoping for another blockbuster IPO heralding the return of the days when the first purchasers got rich, must have been sorely disappointed.
Bond Performance Mixed
Essentially the same mixed picture applies to secondary and primary markets for corporate bonds.
On the one hand, bonds at the higher end of the credit scale are exhibiting the classic “flight to quality” pattern, with investors pushing yields downward, most dramatically in triple-A-land.On the other hand, there is continued weakness in the lower quality levels, even for well-known names. Baa3/BB- rated K mart managed to slightly exceed the size of its planned $400 million offering, but only after offering greatly increased yields.
Looking ahead, the new issue pipeline is forecasting only minimal investment grade activity, with less than $1 billion announced for the near future, including:
- Quest Diagnostics, which plans $500 million of Ba1/BBB- five- and 10-year senior unsecured bonds to repay 10.75 percent senior notes due 2006.
- Health Care Service Corp., a Chicago-based mutual insurance company, which plans to privately sell $350 million of 10-year senior notes.
In junk, some of the many new issuer names include some real dogs:
- Edison International
- Another issue that is sure to get the market reaching for aspirin is Rite Aid Corp. The drug store chain, which last week announced a $3 billion debt refinancing plan, is expected to privately sell $200 million of seven-year (Caa3/B) notes.