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New Corporate Bond Volume Slows; No Major Deals Wednesday

05/16/2012 | 05:00pm US/Eastern
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   By Patrick McGee 
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The pace of corporate bond issuance slowed down Wednesday, but enough small deals got done to suggest investor appetite remains in place despite several days of deteriorating sentiment.

Five high-grade companies borrowed a combined $2 billion Wednesday, down from more than $3 billion of new-volume in each of the prior two sessions.

Larger deals included a $650 million, seven-year offering from asset manager Legg Mason Inc. (>> Legg Mason, Inc.), which was priced to yield 5.682%, or 4.5 percentage points over Treasurys. Also, Cardinal Health (>> Cardinal Health, Inc.) sold a $500 million issue of five- and 10-year bonds at 1.935% and 3.214%, respectively, or 1.20 and 1.45 points over Treasurys.

Offered yields are generally falling as deals flow through the marketing period, suggesting they are being absorbed without much difficulty. But the story is quite different outside the new-issue market.

Markit's CDX North America Investment Grade Index, a barometer of sentiment in the corporate bond market, weakened 1.5% to settle at 119 basis points--its worst level since Jan. 9.

In the past week, the CDX index has jumped 17 basis points, indicating the cost of protecting against default is rising rapidly.

MarketAxess shows the 10 most actively-traded bonds all weakened versus Treasurys on Wednesday, with risk premiums jumping anywhere from 0.03 to 0.26 percentage points.

Bank bonds continue to trade poorly in the secondary market, in part stemming from the $2 billion trading loss reported last Thursday by J.P. Morgan Chase & Co. (>> JPMorgan Chase & Co.).

J.P. Morgan 4.5% bonds due 2022 weakened 0.03 points to a spread over Treasurys of 2.09 Wednesday. Their risk premium has jumped 0.29 points in the past week and 0.35 points this month.

The spread on Goldman Sachs Group (>> Goldman Sachs Group, Inc.) 5.75% coupon 2022 bond, the most active corporate bond in Wednesday's market, weakened 0.11 points Wednesday, contributing to a 0.54 point widening this month.

A trader in Chicago said the Goldman weakening wasn't related to specific news. Instead, Goldman bonds were playing catch-up to other banks, such as Morgan Stanley (MS), whose bonds weakened earlier this year on concerns of exposure to Europe.

"It's the fact that markets might freeze up again if Europe doesn't get a handle on the Greece situation," the trader said.

On May 4, Morgan Stanley five-year bonds were yielding 1.35 points more than comparable Goldman five-year notes; that same spread had narrowed to 1.13 points Wednesday, MarketAxess shows, as Goldman bond yields climb.

"The Europe stuff is real," the trader said. "And if it hurts Morgan Stanley, it will hurt Goldman."

Meantime, corporate-bond spreads have jumped about 0.07 percentage points in the past week to 1.922, according to the Barclays U.S. investment-grade index. But yields have remained at the lowest levels in nearly four decades of data. The Barclays index rose 0.01 point Tuesday to 3.27%.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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