Justin Lederer Comments: Credit Markets: Treasurys Fall; Corporate, ABS Deals Hit Market

January 11, 2012, Wall Street Journal

Treasurys fell despite strong demand at the government’s latest debt sale and signs that investors were focusing more on higher-yielding corporate and asset-backed debt.

"It is [a] safe-haven bid, as there are just so many uncertainties around the globe," said Justin Lederer, senior trader of interest rates at Cantor Fitzgerald LP in New York.

Demand for corporate bonds led SABMiller Holdings Inc. to the market with the largest such deal in nearly a year, meantime. That will bring a preliminary estimate of corporate bond issuance in the first six sessions of the year to a robust $42.475 billion, though that may fall short of the $68 billion sold by companies in the first two weeks of 2011.

Despite the supply, Markit’s CDX North America Investment-Grade Index, a benchmark gauge of the higher-quality corporate bond market, advanced 2.5% as of late afternoon. An index tracking the high-yield market rose 0.6%.


The U.S. government kicked off the 2012 calendar year with a bang, as a sale of $32 billion in three-year notes chalked up the strongest demand on record.

The record demand helped the bond market recoup most of the losses, though benchmark Treasury bond prices ended the session slightly lower, weighed down by further debt sales in the two days ahead. A sale of $21 billion in the 10-year maturity is slated for Wednesday, followed by $13 billion in 30-year bonds on Thursday.

Risk sentiment also improved, with higher U.S. stocks luring some cash out of Treasury bonds as the two markets tend to move in opposite directions.

In late-afternoon trading in New York, the benchmark 10-year note was 4/32 lower to yield 1.974%. The 30-year bond fell 4/32 to yield 3.035%. The two-year note was flat and yielding 0.244%. Bond prices move inversely to their yields.

The biggest highlight from the three-year sale was a record-high bid-to-cover ratio of 3.73, a key gauge of overall demand. It means the number of bids submitted for the sale was 3.73 times the amount on offer, up from an average of 3.37% for the previous four sales.

The new notes were offered at a paltry yield of 0.37%, the third-lowest auctioned yield for the maturity, allowing the U.S. government to continue to borrow at historically cheap interest rates. The auction in September set a record low yield of 0.334%.

Investment-Grade Corporates 

SABMiller Holdings Inc. was brewing the largest corporate bond deal for the U.S. markets since March 2011 as it refinances short-term debt stemming from its US$9.6 billion takeover of Australian brewer Fosters late last year.

The $7 billion SABMiller deal was split among $1 billion of three-year bonds, $2 billion of five-year bonds, $2.5 billion of 10-year bonds, and $1.5 billion of 30-year bonds.

Investor demand helped improve the pricing by at least 10 basis points from earlier guidance, with the latest update showing respective bond spreads of 150 basis points, 165 basis points, 185 basis points, and 200 basis points. Final pricing is expecting later Tuesday.

The $7 billion offering was one of 10 investment-grade corporate deals to hit the U.S. markets Tuesday, with total volume of at least $12.725 billion–the busiest day for issuance since the $15.3 billion on Nov. 7, according to data provider Dealogic.

Scott Kimball, portfolio manager at Miami-based Taplin, Canida & Habacht LLC, which sub-advises the BMO/TCH corporate income fund, said it was notable that the issuer is able to issue across the yield curve, which he attributed to the perception of SABMiller being a defensive credit.

"They have a pretty diversified portfolio of beverages and some that have a cult following, for instance they recently purchased Foster’s, the ‘Australian for Beer’ name," Kimball said. "It’s not a classic defensive name like a utility, but the alcohol market has a high degree of counter-cyclicality and they have a wide degree of offerings."

SABMiller is the financing arm of the London global brewing company, which owns brands including Miller Genuine Draft, Milwaukee’s Best, Castle, and Pilsner Urquell.

The $7 billion debt offering is the largest U.S. marketed deal since March 22, 2011, when the French pharmaceutical group Sanofi-Aventis issued $7 billion in a six-tranche deal to help it acquire Genzyme Corporation, a Massachusetts biotechnology company, according to Dealogic

Municipal Bonds 

Municipal bonds maturing in 10, 15, 20, 25 and 30 years hit all-time low yields, according to the Thomson Reuters Municipal Market Data’s AAA benchmark scale. Bonds maturing between 2025 and 2042 outperformed the most, with yields dropping 5 basis points Tuesday, according to MMD.

Domenic Vonella, market analyst at MMD, attributed the all-time lows to anemic new issue supply and high demand from investors, who are flush with cash from January redemptions. He also noted that money managers are touting munis as a safe investment.

In the primary market, Ohio continued with its sale of about $210 million in general obligation bonds, which were offered to individual investors Monday and institutions Tuesday. Yields fell as much as 7 basis points across maturities, indicating good demand, said Larry Scurlock, assistant debt manager for Ohio. The state also increased the bond sale by more than $30 million.

Mortgage- and Asset-Backed Securities 

The $2.8 billion in auto and student loan asset-backed securities set for sale this week are seen pricing cheaper than secondary markets due to the heavy supply, according to a dealer. Auto loan deals including Ally Financial’s $1.08 billion in ABS, may yield 15-19 bps over eurodollar synthetic forward rates for one-year debt, or about 5-8bps cheaper than today’s levels, according to initial price guidance.

But another $1.7 billion CenterPoint Energy "rate reduction bond" backed by power transmission line fees was drawing enough demand to near pricing at 55-60 basis points over interest rate swap rates for seven-year debt, down from speculation for a 70 basis point spread, said one investor.

Meantime, Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) are expected to sell a $1 billion commercial mortgage-backed security next week in the first CMBS of the year, according to an investor familiar with the deal.

In agency MBS, investors rushed back into bonds paying 5.5% and other high rates of interest as speculation over a government-led refinance program died down, and as lower-coupon securities had become expensive, a trader said. Investors will remain wary of how much the U.S.’s expanded Home Affordable Refinance Program will trigger prepayments on those high-coupon MBS, however.

Some rotation out of lower coupons came as investors expected slowing prepayments in those bonds will mean less reinvestment in by the Federal Reserve, said Walter Schmidt, head of mortgage strategy at FTN Financial.