Tuesday Corporate Bond Brief

Fixed income traders are busy on Tuesday although bond prices are little changed ahead of the vote of confidence among Greek lawmakers called by its Prime Minister. The lack of escalation of bad news ahead of the vote has swept the issue under the carpet on a day when U.S. investors preferred to look at equity valuations rather than the prospect that a Papandreou flop could by the start of a slide towards default for the nation. Corporate bond volumes were healthy with Bank of America’s five-and-10-year paper still finding reasonable demand.

Investment Grade

ArcelorMittal (MT) – Being careful not to kill the goose that laid the golden egg CEO Lakshmi Mittal warned that among the biggest threats to global growth is a rally in commodity prices. Indeed shares in the steel maker forged ahead by more than 2% after its CEO predicted a pick-up in steel orders by the end of the third quarter adding that Chinese steel demand was likely to grow by 7% this year. Mr. Mittal said that lower than usual inventories and robust underlying demand would ensure a third quarter rise in orders. Bonds issued by the company were also in demand with its 10-and 30-year maturities changing hands on volume of around $100mm ahead of lunchtime in New York. Both issues saw premiums over treasury securities narrow on Tuesday with the spread above government paper in the March 2021 maturity coming in by one pip to 245 basis points. The March 2041 issue saw its premium narrow by six basis points to 262 basis points as its face value advanced in price terms by 85 cents per $1,000 invested in the paper.

Non-Investment Grade

Vale Overseas Ltd. – Bonds issued by the subsidiary of the Brazilian miner have been out of favor for as long as commodity prices tumbled. Between February 10 and June 1 shares in the underlying ticker (VALE) lost 6.6% while the yield on its November 2036 maturity rallied harder 11 basis points harder than the 64 pip rally in the long bond forcing the premium to narrow to 165 basis points above the government issue. But since the start of June the two securities have moved in opposite directions with the spread blowing out to 215 basis points at the end of last week, likely on escalating concern for the health of the global economy. Vale Overseas paper was back in the action on Tuesday with investors picking off more than $25mm. The company announced last week that it would not follow through on plans to develop a distribution hub as planned in China saying it would instead locate its hub in Malaysia. Shares in VALE are also higher by 2% on Tuesday.

Muni-Bond Corner – The State of Georgia successfully sold over $900mm in bonds Tuesday pricing bonds five basis points over the AAA-Muni yield curve. Yields ranged from 0.47% in 2013 to 3.89% in 2031. These bonds are rated AAA/Aaa. Credit spreads from single A-rated through AAA-rated bonds are at historically wide spreads. Single-A municipal bonds currently yield 3.72% or 109bps over AAA-bonds yielding 2.63%. The rally in Muni bonds has been strongest in the high grade sectors. Retail investors are now moving down the credit curve to attract higher yields. The default rate for single A-rated bonds is 10-times less likely than similarly rated corporate bonds. Triple-B spreads are wider than they were during the height of the credit crisis when they reached a whopping 200 basis points. Many analysts are recommending moving down the credit curve as states get their finances in order by cutting expenditure, hiking taxes, both of which are credit positive events