US credit pounded after Bernanke signals tapering

Wed Jun 19, 2013 5:51pm EDT

June 19 (IFR) - US credit markets were battered on Wednesday as Treasury yields spiked after Federal Reserve Chairman Ben Bernanke signalled a possible end to its asset purchase program later this year.

The credit markets have been reeling for the past few weeks amid speculation about the timing of a potential 'tapering' of the central bank's quantitative easing programme.

Bernanke's comments that the Fed may slow the pace of its bond purchases later this year and completely stop the program around mid-2014 brought fresh anxiety and sparked a bout of selling.

"It's a disaster," said a head of corporate bond investment at a large money management firm. "This is much quicker tapering than the market thought. It's more like a cold turkey taper."

The CDX IG20, a key index of credit default swaps, widened 5.25 basis points to 87.25bp on the news, while the CDX HY20 plunged over a point and a half to 102.71, levels last seen in early April.

Investors scrambled to pull cash from the iShares iBoxx $ Investment Grade Corporate Bond Fund, which fell 1.37% on the day to the lowest price level in 14 months.

In the secondary market, Apple's USD5.5bn 2.4% 10-year bonds lost more than a point in dollar price to trade at USD93.15 -- down almost seven points from their issuance on April 30.

Apple sold a record USD17bn of bonds in the biggest-ever high-grade offering, garnering more than USD50bn of orders at the height of the market's strength. But its enormous size has now made it the most convenient way for investors to slash their positions in the high-grade market.

Apple's US$3bn 3.85% 30-year also lost a point in dollar price on Wednesday and has plunged to US$89.75 since its launch.

"Apple is now the most relevant benchmark/barometer, as it is liquid, the bid/ask spread is tight and almost everyone owns the bonds," said a syndicate banker.

Bankers said issuers should brace for higher funding costs and should expect further turmoil in deal execution.

"We are back to a period of 'uncertainty' in regards to what it takes to clear trades," said a syndicate banker. "A new landing strip has to now be developed in terms of the right implied premiums to start trades, and how much pricing leverage (if any) to finish."

Activity in the primary high-grade markets is expected to come to a standstill for the next two days, after chalking up volume of USD12.85bn for the week.

But in the medium term, the pipeline is expected to be filled with issuers trying to beat an expected continued rise in Treasury yields.

"The real question is will there be a near-term volume surge because of the removal of uncertainty regarding the FOMC and expected ongoing volatility, or will borrowers move to the sidelines early given pending earnings-related blackouts," said Peter Aherne, head of North American capital markets, syndicate and new products at Citigroup.

High-grade borrowers from Latin America are also expected to put deals on hold in the near term. And prospective borrowers will have to accept higher funding levels.

Already, US high-grade issuers have been forced to be conservative on pricing, announcing deals with initial price thoughts with chunky new issue concessions, then using a resultant increase in investor demand as leverage to ensure a tighter final pricing.

Even using this approach, many transactions have still priced with new issue concessions ranging from 10bp to 25bp.

Still, bankers said there is some optimism that issuance momentum will revive in the coming week with the real test likely to come through any trades that go out on Monday.

"Next week could be surprisingly big, especially if trades announced on Monday go well," said one banker.

That week is followed by the July 4 holiday, he said.

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