Spreads Edge out as Large Supply Continues        

                                                     

From 5/16 through 5/20 corporate supply continued heavy with about 60 issuers, including so many familiar utility and industrial names (Duke Energy, Alabama Power, McDonald’s, J&J, Google, Disney) to go with some new or obscure high-yield credits, especially in the oil & gas sector.  There were unusually small spread changes for the week in all sectors for the fifth straight week – spreads have reached a tentative equilibrium for the moment. The main bond sectors I follow performed as follows:

 

 

Significant new issues for the week: all major issues are summarized in categories as follows (some ratings are estimated):

Aaa/AAA:  Rabobank (Aaa/AAA) +115/30; Johnson & Johnson (Aaa/AAA) +19/2, +33/3, +43/5, +55/10, +68/30; Canada Housing Trust (Aaa/AAA) (Canadian $) +35/10-yr Canada bond); Freddie Mac (Aaa/AAA) +25/5;

Aa/AA: Google Inc. (Aa2/AA-) +33/3, +43/5, +58/10; HSBC Bank Plc (Aa2/AA) +133/5; Eksportfinans ASA (Aa1/AA) +56/5;

Aa/A: U.S. Bancorp (Aa3/A+) +97/10;

A/A: Duke Energy Carolinas (A1/A) +75/10; Texas Instruments (NR/A+) +37/2, +50/3, +60/5; Rio Tinto Finance (A3/A-) +83/5, +103/10, +113/30; Caterpillar Financial (A2/A) +47/3; South Carolina Electric & Gas (A3/A) (first mortgage bond) +105/30; Walt Disney Co. (A2/A) +60/10; Alabama Power (A2/A) +82/10, +95/30; Public service New Hampshire (A3/A-) (first mortgage bond) +88/10; Blackrock Inc. (A1/A+) +115/10;

A3/BBB: Burlington Northern Santa Fe (A3/BBB+) +100/10, +115/30; Kellogg Corp. (A3/BBB+) +80/7; Aetna Inc. (Baa1/A-) +118/10; Cintas Corp. No. 2 (A2/BBB+) +100/5, +115/10;

Baa/BBB:  Great Plains Energy (Baa3/BBB-) +170/10; Energizer Holdings (Baa3/BBB-) +155/10; Ryder System Inc. (Baa1/BBB+) +175/6; QBE Capital Funding III Ltd. (Baa1/BBB+) (fix-to-float) +412/30; Liberty Mutual (Baa2/BBB-) +210/10; UDR Inc. (Baa2/BBB) +190/7; Norfolk Southern (Baa1/BBB+) +175/30; Comision Federale de Electric (Mexico) (Baa1/BBB) +180/10; Icici Bank Ltd./Dubai (Baa2/BBB-) +295/5; Banco Brasil (Baa2/NR) +287/10; CSX Corp. (Baa3/BBB) +115/10, +125/30;

Ba/BB: Pertamina (Ba1/BB+) +235/10, +232/30; Centene Corp. (Ba2/BB) +384/6; Amkor Tech. Inc. (Ba3/BB) +352/10; R.R. Donnelly & Sons Co. (Ba1/BB+) +483/7; Alpha Natural Resources (Ba3/BB) +325/10; Host Hotels & Resorts (Ba1/BB+) +321/8;

Baa/B: International Lease Finance Corp. (B1/BBB-) +393/5, +308/8;

Ba/B: EH Holding Corp. (Ba3/B+) (secured debt) +409/8; Concho Resources (B3/BB) +338/10; JBS USA Finance (B1/BB) +435/10; 

B/B: E*Trade Financial (B2/B-) +494/5; First Wind Capital LLC (B3/B+) +783/7; Longview Fibre (B2/B+) +634/5; EH Holding Corp. (B3/B-) +451/10; Petrohawk Energy (B3/B+) +356/8; Eldorado Resorts LLC/Cap (B2/B+) +585/8; Chrysler GP/CG Co-Issuer (B2/B) +524/8, +506/10; Kindred Escrow Corp. (B3/B-) +552/8; Xerium Technology (B3/B) +640/7;

Caa/BB: Connacher Oil (Canadian $) (Caa2/BB-) +596/7-yr Canada bond, +571/8-yr Canada bond;   

Caa/CCC: Brigham Exploration Corp. (Caa1/CCC+) +411/8;

New deals are starting to look cheaper now that spreads have leveled off in the past month+, but a whole raft of well-known utilities and “brand-name” industrials came as rich as I would expect them to, in my opinion! On the other hand, some high-and-medium-rated financials were forced to come cheaply due to the glut of supply combined with their less-than-household name status, such as AA-rated HSBC (+133/5), Banco Brasil (Baa2/NR) (+287/10) and Liberty Mutual (Baa2/BBB-) (+210/10). Although I don’t personally know Banco Brasil, I’m very bullish on Brazil’s present and future, so I’m guessing that like the other two I do know (Liberty Mutual and HSBC) it represents value in a market which overvalues well-known industrials.                                        

Conclusion:  Secondary investment-grade and high-yield corporate bonds are still in favorable (albeit attenuated) trends, but are now past the seasonally “right” time of year for outperformance; most new nonfinancial issues are still being priced rich to secondaries.  Investment-grade corporate bonds still look like they will probably outperform Treasuries over the next two-to-three year period, but I expect most of that outperformance will recommence later in the year – not in the May-October period.

Good luck and good investing,

Stephen Smart, CFA

Chicago (630-363-8511) stephen.h.smart@gmail.com

Carolina Capital Markets

Chapel Hill (919-960-0807) smart@bonddog.com

The Smart Bond Guy

“Stephen Smart is an in-house research analyst and former portfolio manager.  Recommendations in this report are based on an independent evaluation of particular bonds and do not necessarily represent the views of CCM or its representatives. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Returns and yields are not guaranteed and may be subject to change. Neither CCM nor its affiliates own or position the recommended security. CCM is an independent, non-positioning fixed income broker/dealer providing execution and research to their clients on a fully compliant and transparent platform. The views expressed in the research report accurately reflect Stephen Smart’s personal views about the subject securities and issuers and no part of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report; or to learn more about how to utilize SEC rule 28(e) in acquiring research through CCM, contact a CCM representative at (800) 922-6864.

             

                             

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