NEW YORK, Jan 14 (IFR) - The US high-grade market set a new
weekly volume record last week despite indications that
investors and issuers alike are growing increasingly anxious
about the months ahead. Last week's investment-grade volume
reached US$41.61bn, topping the previous best of US$40.642 that
was set in March last year.
But unlike then, when the market tone was buoyant, the
current mood is decidedly more sombre, with anxiety mounting as
credit indices compress towards more complacent levels, with
spread-compression leaving little cushion for error.
"There is an absence of broad momentum in credit mainly
because primary supply has been more than expected, and it is
hard to be too bullish about spread or rate-tightening when
bonds are trading near historic tights," said one senior banker.
The fact that yields were touching new lows is also sucking
out enthusiasm towards new issues and momentum in credit
Yields on the Barclays US Corporate Investment Grade Index
at the start of Friday were near a record-low yield-to-worst of
2.74% - this compares with 3.80% at the start of 2012.
A CASE OF NERVES
One banker said there was a creeping nervousness about the
market at the moment, which was also creating price sensitivity
towards forthcoming new issues.
Few new issue names were trading with any specific impetus
last week. Comcast's 2.85% 2023s were trading flat
versus their pricing of Treasuries plus 100bp, while its 4.25%
2033s were at Treasuries plus 122bp versus their plus 125bp
pricing. Ford's 4.75% 2043s were trading at Treasuries
plus 191bp versus 180bp at pricing, according to Tradeweb.
A tick-up in Treasury yields - the 10-year is approaching 2%
- is luring investors to look at shorter duration and
floating-rate bonds, as an additional jump in interest rates
could translate into significant losses for those stuck with
If interest rates were to revert rapidly to early 2011
levels with a 200bp rise, for example, a Triple B rated
corporate bond with a 10-year maturity could lose 15% of its
market value, Fitch analysts said in a recent report.
Mindful of that, corporate issuers last Thursday priced
eight of 10 tranches with tenors of five years or less,
including a single floater. For example, Total Capital Canada
Ltd & Total Capital Intl raised US$3.25bn from a four-part
offering that comprised a tap of its 0.75% January 2016s, a new
US$1bn three-year FRN, a US$1bn five-year and a US$1bn 10-year.
Sumitomo Mitsui Banking Corp's three-part offering also
consisted of a three-year, five-year and 10-year, while DirecTV
Holdings LLC & DirecTV Co Inc raised US$750m from a
five-year and TransCanada PipeLines priced a US$750m three-year.
All this follows recent issuance of one and two-year floaters by
GE Capital, MetLife, Daimler Finance and RBC.
LOW RETURNS LEAD TO EQUITIES
Returns in the corporate bond markets are also expected to
be so low this year - and the threat of rising interest rates so
real - that some strategists say investors should start pulling
money out of bonds and putting it into stocks.
Investment-grade bonds are expected to provide a mere
1.6%-3% in returns in 2013, down from 9.6% last year and an
average of around 12% every year since the credit crisis. Even
high-yield returns will plunge to around 3%-7% in 2013, a drop
from 15% last year and an annual average of 22% since the start
of the crisis.
Meanwhile, the S&P 500 is forecast to produce double-digit
returns this year, after 2012 returns of about 13.5%.
"Rising long-term interest rates represent the key risk for
investment-grade credit in 2013," said Hans Mikkelsen, credit
strategist at Bank of America Merrill Lynch, in mid-December.
"Given ultra-low investment-grade yields of 2.75% to start,
if 10-year Treasury yields increase to just 2.3% in 2013 - which
appears not an outrageously high number - the return on
investment-grade corporate bonds next year could turn negative."
Many fixed income portfolio managers lost interest in Single
A and higher rated industrial corporate bonds months ago.
"There is no doubt that if rates go up, there is no cushion
for those bonds with mid double-digit credit spreads between
30bp and 90bp over Treasuries," said Michael Collins, a senior
portfolio manager at Prudential.
"Total returns will be low single digits or negative for a
big chunk of the investment-grade market if rates increase, and
a lot of people believe that will be the case," he said.
But amid this heightened nervousness in the market about
spread-compression, supply/demand imbalances are still providing
strong technicals for credit spreads and a supportive backdrop
to corporate valuations.
Investment-grade bond funds reported a weekly net inflow of
US$2.164bn for the week ending January 9, according to Lipper
data. The four-week moving average dataset for both monthly and
weekly cash entering the asset class was reported at a rate of
US$1.566bn per week.
In the week ended January 9, the weekly only reporting
dataset of corporate-high yield reported net investor inflows of
US$1.113bn. The four-week moving average for the dataset reports
cash leaving the sector at a rate of a negative US$15.3m per
week, as measured over four weeks.
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