June turned out to be quite an eventful month for the corporate bond market. Moody's went on a downgrade blitz, first going after 15 global banks and securities firms and a few days later taking down 28 Spanish banks with them. The one company that received perhaps the most attention from the downgrades was Morgan Stanley (MS). It was feared that Morgan Stanley would suffer a three-notch downgrade, but instead it escaped with "only" a two-notch slashing with the senior unsecured debt rating falling from A2 to Baa1. For some of my recent observations on Morgan Stanley's senior unsecured debt, see "The Market Says Morgan Stanley Is 'Junk'."
In other news, Deere & Company (DE) sold $1.25 billion of 6/9/2042 maturing senior unsecured notes, CUSIP 244199BF1. These notes are rated A2/A by Moody's and S&P respectively. The noteworthy part of the issuance was that the coupon of 3.90% tied for the second lowest 30-year corporate bond coupon on record. Southern California Edison, a subsidiary of Edison International (EIX), also sold 30-year debt with a 3.90% coupon in 2011. The record is held by McDonald's (MCD), which issued 30-year debt with a 3.70% coupon in February 2012.
The coal industry continued to show signs of stress. In particular, "The Canary In Patriot Coal's Mine Looks Very Sick." Patriot Coal's (PCX) 4/30/2018 maturing, 8.25% coupon, senior unsecured notes continued to plunge in June, falling from around 50 cents on the dollar at the start of the month to under 30 cents on the dollar during the final week. On June 26, $30,000 face value of the 2018 maturing note sold for 27.834 cents on the dollar to yield a whopping 42.492%. But, it should be noted that by the last day of the month, the bonds recovered a bit and closed the month with a bid/ask of 34.7 by 40 cents on the dollar.
When looking at the high-yield portion of the corporate bond market, junk bonds performed quite strongly during the month of June. The two popular high-yield bond ETFs, HYG and JNK, both bottomed on the first trading day of June and reached their highest close on the last trading day of the month.
In terms of the advance/decline ratio for the high-yield corporate bond market, it also bottomed on June 1 and ended the month on its high. As the table below illustrates, the advance/decline ratio remained above one for 17 of the last 18 trading days.
High-Yield Corporate Bonds Advance/Decline Ratio
Source of underlying data: FINRA
Regarding high-yield spreads, there was also a notable improvement as the month progressed, as the "BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread" topped out on June 5 at 7.23% before declining more than 70 basis points as the month progressed. Although high-yield spreads have narrowed a good deal since my June 6 article, "This Part Of The Bond Market Has Real Value," the article's discussion of how spreads help create value may be worth a look, especially if you're interested in buying high-yield on the next dip.
In terms of price action and spreads, investment grade corporate bonds fared similarly to high-yield with higher prices and narrower spreads, although to a lesser degree. The popular investment grade corporate bond ETF, LQD, bottomed early in the month, on June 6, and closed the month just off its highs. This was similar to the experiences of the high-yield ETFs, HYG and JNK. The "BofA Merrill Lynch US Corporate Master Option-Adjusted Spread," based on bonds with investment grade ratings, narrowed like its high-yield counterpart did, albeit on a much smaller scale.
The one area in which investment grade differed from high-yield during the month of June was in the advance/decline ratio. The investment grade advance/decline ratio, as illustrated in the table below, was extremely choppy. It spent 9 of the 21 trading days under one versus just 4 days for high-yield. Furthermore, the days during which the advance/decline ratio was below one were spread out throughout the month, unlike the high-yield market's experience. And, the investment grade advance/decline ratio finished nowhere near its high of the month whereas the high-yield ratio finished June right at its high.
Investment Grade Corporate Bonds Advance/Decline Ratio
Source of underlying data: FINRA
What explains the choppiness of the investment grade advance/decline line? In the beginning of the month, the weakness can be at least partly attributed to the wider spreads. However, later in the month, when spreads were narrowing, the advance/decline ratio also showed weakness. Although it's hard to know for sure, it's probably not a coincidence that every day the investment grade advance/decline ratio fell under one was also a day the 10-year Treasury note closed the day higher in yield and lower in price. Given the relatively small narrowing of the "BofA Merrill Lynch US Corporate Master Option-Adjusted Spread" during the month of June, it makes sense that many investment grade bonds would follow the price movements of benchmark Treasury yields throughout the month.
Disclosure: I am long HYG.