Thursday Corporate Bond Brief

Includes: BAC, LYG, MDLZ, WFC
by: Interactive Brokers

While we know that the Fed is unlikely to move interest rates this year and possibly all of 2012, we should expect the occasional piece of positive economic data to come along and carpet-bomb the bond market on occasion. Today’s long-range missile came from an unexpected jump in manufacturing activity in the Chicago-area where manufacturers reported a healthy pace of activity. Yields continued to retreat from a recent nadir as equity prices similarly advanced. Corporate bonds came back in to favor with some spreads narrowing in light of increasing economic optimism.

Investment Grade

Lloyds TSB Bank Pls. (NYSE:LYG) Shares in Lloyds TSB surged by more than 10% after its CEO announced a huge downsizing that allows the bank to focus on domestic retail issues. Bonds issued by the partially-government-owned banker, like many European issues, have failed to benefit from the recent slide in yields as investors shunned overseas bonds. The bank promised annual savings of £2 billion ($3.2billion) after swallowing mortgage lender HBOS and says that on account of centralizing management functions and withdrawing from half of its 30-overseas centers, will save a further £1.5 billion ($2.4 billion). News of today’s cost-cutting initiative appears to have reversed some of that sentiment with buyers scooping up $30mm of its January 2021 maturity lifting its price by 30 cents on an investment of $1,000 and allowing its yield to ease to 5.83% on Thursday.

Wells Fargo & Co. (NYSE:WFC) – With a 12% share price rally behind it since early June when shares reached the lowest in eight months, Wells Fargo is back in favor with investors as the financial sector snaps back. The banker’s paper is also well bid Thursday with investors churning $47mm of its January 2013 paper driving the yield down to 1.15% earlier.

Bank of America (NYSE:BAC) There was similar demand for the BAC name on Thursday with investors trading $27mm of its A2-rated paper. The April 2015 issue earlier advanced by as much as $2.67 per $1,000 invested before the heavy selling across the broader treasury market hampered progress. The yield on the four-year maturity eased to 3.22%.

Kraft Foods Inc. (KFT) –Another 52-week high for food and snack-maker Kraft and more demand for its 5.375% coupon-bearing nine-year paper. Investors were all over Kraft’s issue today with more than $70mm changing hands by lunchtime. While the price of its Baa2-rated paper fell by 25 cents per $1,000 invested, its paper outperformed a sliding treasury market causing a five basis point reduction in the yield premium over government paper to 91 pips. Earlier in the week Kraft announced a five-month delay in the addition to 20,000 supermarkets and retail outlets of its premium Gevalia coffee brand. The company said that an overwhelming response meant it needed more time to ramp-up production by January.

Muni-Bond Corner

Thirty-day visible municipal supply has dropped to $8.7 billion from a recent high of $9.9 billion. Munis continue to outperform government-backed treasuries. The outperformance of munis lowered the 10-year muni-Treasury ratio to 86.5% Wednesday and down from 92% last Friday. Today marks the end of the second quarter. Weakness is also driven by excess balances of recent new issues on the books of dealers. There was expectation that the reinvestment period would help munis but it seems that retail has balked at these low yields and in fact been better sellers of bonds. Higher yielding deals are having better success than strong credits as spreads are too tight for AA and higher bonds.

Citizens Property Insurance Corp. in Florida priced $900 million (A2/A-). They issued serial bonds maturing between 2015 and 2020, with yields ranging from 3.08% to 4.75%. Also Puerto Rico’s GO deal was upsized from 305 to $603mm (A3, BBB). Puerto Rico bonds carry a triple tax exemption at the city, state and federal level for US investors.