Risk assets retreated and safe-haven investments reclaimed
higher ground Monday as the latest negotiations in Greece
stalled.
But while investors who had been bullish on growth had some
reason to pause, corporate borrowers found a receptive audience as
they flooded the bond market.
Aristotle Holding Inc., a unit of Express Scripts Inc. (ESRX),
was the largest borrower as it sought investors for its $3.5
billion multi-tranche issue. But it was the $300 million deal of
single-A-rated notes from Kimberly-Clark Corp. (KMB) that best
exemplified how cheaply corporations can tap the market.
The Dallas personal- care, consumer-tissue, health-care company
paid 2.573% to borrow 10-year debt, reflecting a spread to
Treasurys of just 68 basis points.
The primary market was on track to digest nearly $7 billion of
investment-grade supply Monday as a variety of issuers jumped into
the market to take advantage of some of the lowest borrowing rates
ever.
Treasurys, meanwhile, were able to recover slightly after
experiencing the worst single-day selloff since October in the wake
up Friday's encouraging U.S. payrolls report. The yield on the
benchmark 10-year Treasury note fell more than two basis points
Monday to 1.90%, as demand for the bond suppressed its yield, but
any rally was tempered by the pipeline of new supply coming later
this week.
The push to safe-havens hurt corporate bonds only in certain
spots, and municipal bonds struggled a bit as well. But considering
the depth of the rally in 2012, Monday was hardly a day of
turnarounds.
Treasurys
Uncertainties over a bond-swap deal to avoid a disorderly
default by Greece rode to the Treasury market's rescue on
Monday.
The price strength, following a big selloff at the end of last
week, was the latest reminder that, with the euro zone's
sovereign-debt crisis still unsettled, Treasury bonds continue to
lure investors looking for a safe place to preserve capital even as
yields trade near historical lows.
"Lower equities, bottom fishing and the news an agreement still
has not been reached on a Greek debt deal" all contributed to the
rally in Treasury bonds, said Mary Ann Hurley, vice president of
trading at D.A. Davidson & Co. in Seattle.
So far, any selloff driven by uplifting U.S. economic releases
including Friday's non-farm payrolls report has been short-lived.
Traders said the tug of war between U.S. data and the euro zone's
debt concerns will continue to keep bond yields in a tight--and
low--range. The benchmark 10-year note's yield has been trapped
between 1.8% and 2.1% since the start of November.
In late-afternoon trade, the benchmark 10-year Treasury note was
13/32 higher to yield 1.903%. The 30-year bond was 17/32 higher to
yield 3.121%. The two-year note was flat to yield 0.234%. Bond
prices and yields move in opposite directions.
The rally was somewhat tempered ahead of this week's $72 billion
in new debt sales. The Treasury Department is scheduled to sell $32
billion in three-year notes on Tuesday, $24 billion in 10-year
notes on Wednesday and $16 billion in 30-year bonds on
Thursday.
Investment-Grade Corporates
February issuance continued at a rapid clip Monday as at least
five high-grade borrowers took advantage of ultra-low borrowing
rates in the U.S. credit markets.
Monday's calendar included two major deals: A $3.5 billion
offering from Aristotle Holding, and a $1.5 billion deal from
Brasil Telecom SA (BTM, BRTO4.BR). Both were expected to price late
Monday.
It also featured $800 million deals from two Yankee bank
borrowers: Sao Paulo's Banco Santander Brasil SA, and Deutsche Bank
AG (DB, DBK.XE).
Along with the $300 million Kimberly-Clark issue, $6.9 billion
was supposed to price by day's end. And that doesn't include a $600
million deal of covered bonds from Montreal-based National Bank of
Canada (NA.T), which sold 2.2% coupon bonds priced to yield 1.417%,
or 67 basis points over Treasurys.
Borrowers have been rushing to the market to take advantage of
cheap financing resulting from the Federal Reserve's policy of
keeping interest rates depressed through 2014. Appetite has
broadened in recent weeks, based on encouraging growth data in the
U.S. and less-burdensome headlines from Europe.
Although the market tone weakened Monday on news that Greek
negotiators have so far failed to agree on the specifics of
austerity measures, which are necessary for the country to receive
a second bailout package worth EUR130 billion ($170.6 billion),
corporate bonds were fairly resilient.
Markit's CDX North America Investment Grade Index, a measure of
health in the U.S. corporate market, deteriorated only 0.5% in late
afternoon trading. After last week's rally left the index as its
best level since July, the index now stands at 94.8 basis points,
the second-best level since July.
Monday's new issues follow a massive start to February, with
$20.2 billion of investment-grade bonds getting sold in the first
three sessions of the month alone--roughly one-third the total for
all of February 2011, according to Dealogic.
Borrowers that came to market last week achieved record-low
interest rates at the three-, five-, 10-, and 30-year maturities.
McDonald's Corp. (MCD), for instance, sold 30-year bonds bearing an
interest rate of 3.70%--the first-ever 30-year sale of
dollar-denominated debt selling at less than 4%.
Investors have been rewarded, too. Barclays' index of
investment-grade bank bonds returned 4.34% year-to-date, as of
Friday, and high-yield bank bonds returned a whopping 10.66%.
Among Monday's new issues, yields were dropping in the marketing
period and Deutsche Bank enlarged its deal by $100 million,
indicating deep pockets of demand.
Municipal Bonds
The prices of top-rated municipal bonds were largely unchanged
Monday, though debt maturing in the 10-year range showed some
losses, according to a widely watched benchmark from Thomson
Reuters Municipal Market data.
Debt maturing between 2021 and 2022 saw yields rise two basis
points, while debt maturing in 2023 saw yields rise one basis
point, according to MMD.
The municipal-bond market has largely rallied since the start of
the year, as relatively low supply has helped to drive up prices.
The market showed some losses across the curve on Friday, but some
market participants remained optimistic that the market rally would
ultimately continue.
"It's just taking a breather here," Burton Mulford, portfolio
manager at Eagle Asset Management, said Monday morning. "I really
think that munis are the best asset class to be in if you're
looking for income with preservation of principal as your No. 1
priority."
In primary-market activity Monday, Tarrant Regional Water
District, Dallas, Texas, lowered yields by three basis points on
the 2052 maturity of a $150 million bond sale, suggesting good
demand, according to a repricing wire from Ipreo. Shelby County,
Tenn., held a retail order period for $264 million in
general-obligation refunding bonds, as did Washington State
University for a $73 million revenue-bond sale.
Mortgages
Wall Street dealers are teeing up about $1.8 billion in
commercial real-estate bonds backed by just a single borrower in
the coming weeks as their sales of traditional multi-loan deals
have been slow out of the gates, according to investors.
Trophy properties including the Fontainebleau Hotel in Miami
Beach and the 9 West 57th Street office tower in midtown Manhattan
top the collateral for the single-borrower issues that are often
investor favorites for low debt relative to equity. For now, they
are filling a void left by traditional "conduit" CMBS whose
production was interrupted by volatile markets in late 2011.
Single-borrower issues are often preferred by investors because
they can better understand the credit versus other issues that
aggregate dozens of loans from different real-estate sectors.
Borrowers willing to bolster the issue with equity will also get
sweeter terms than in a multi-loan "conduit."
"The reality is you can probably get better execution" in a
single-borrower deal, said Alan Todd, head of CMBS strategy at Bank
of America Merrill Lynch.
"There's a positive story with the borrower usually willing to
put in equity. In pooling, the benefits and transparency of a
single-borrower deal get diluted to some extent."
UBS Securities is preparing the $600 million CMBS for the
Fontainebleau Hotel, while Deutsche Bank will issue $625 million in
bonds backed by a loan on 9 West 57th Street, according to
investors who were briefed by dealers. J.P. Morgan Chase & Co.
is planning an $80 million loan to help fund Silverstein
Properties' 7 World Trade Center, one of the investors said.
Bank of America Merrill Lynch and Deutsche Bank are planning to
sell $500 million in commercial mortgage-backed securities backed
by 261 properties run by OSI Restaurant Partners, known for Outback
Steakhouse and Carrabba's Italian Grill franchises, according to a
terms obtained by Dow Jones Newswires. The dealers intend to issue
$175 million in mezzanine debt as early as this week, and follow
with $325 million of senior debt in March, said an investor.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382;
patrick.mcgee@dowjones.com
--Min Zeng, Mike Cherney, and Al Yoon contributed to this
article.
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