Global News

Tuesday August 31, 2010

By Romy Varghese of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The release of the minutes of the Federal Open Market Committee meeting Aug. 10 helped boost agency mortgage bonds and Treasurys Tuesday.

The minutes showed the Federal Reserve hasn't ruled out reinvesting in mortgages, and Treasurys held onto gains after the release.

Most Fed policy makers agreed the new strategy of reinvesting maturing or refinanced mortgage-related securities was necessary given the weakening economic recovery.

Investment-Grade Corporates

Late-August corporate issuance remained slow Tuesday, with just one new deal.

Stanley Black & Decker, Inc. sold a $400 million 30-year senior unsecured bond offering at 165 basis points over Treasurys via Barclays, Citi, J.P. Morgan and UBS, according to a person familiar with the deal. The bonds were rated Baa1 by Moody's Investors Service and A by Standard & Poor's. Proceeds will go toward reducing borrowings and for other general corporate purposes.

Not including the Stanley deal, high-grade issuance totaled $76.1 billion in August, according to Dealogic.

The Markit CDX North America Investment Grade derivatives index weakened Tuesday, widening by 1.7 points to 115.2, according to index administrator Markit. for the past couple of weeks, that index has been more volatile than the cash bond market, according Jim Merli, head of debt distribution and origination at Nomura Securities.

"With the exception of the [financial] space we have not seen any significant widening in cash spreads," Merli said. "We think that while macro views are being expressed in the index products the willingness to buy cash bonds has not diminished."

Junk bonds closed out a record-setting August and look poised to resume their bull run in September.

August saw $23.0 billion in high yield bond issuance, according to data provider Dealogic, the 7th largest monthly volume on record. The performance was remarkable because August has historically been a relatively quiet month, and because no junk bonds priced during August's final ten days.

Issuance should ramp up pretty quickly after Labor Day. The twin engines driving high yield issuance during this time of low interest rates have been companies issuing new, longer-dated bonds to pay off old bonds or loans, and investors scouring markets for any kind of returns they can find. neither of those drivers shows any sign of a slowdown, while investors still see upside.

"Considering the continued improvement in corporate balance sheets and how much demand there's been for high yield, there's still a lot of value in the high yield market," said Gibson Smith, fixed-income portfolio manager at Janus Capital Group.

Fund managers such as Smith cite current average high yield risk premiums of 6.9 percentage points above Treasurys, more than a full percentage point higher than historical norms, and say that could shrink further without getting out of line with default expectations, even while underlying Treasury rates bounce along near historic lows.

Asset-Backed Securities

in August, six auto sector asset-backed deals totaling $4.1 billion were priced, compared with $4.5 billion from seven deals in July, according to a note from Barclays. no new credit card deals were issued this month, breaking the one deal per month issuance trend for the three preceding months. two student loan deals, totaling $950 million, came to market in August, a substantial decrease from the $3.3 billion priced in July.

Despite the summer slowdown, the analysts expect volumes to pick up over the next several months, "as investors and issuers return from summer holiday and focus on funding needs for the remainder of the year."

Agency mortgages found new energy and tightened after the release of the FOMC minutes at the prospect of the Federal Reserve returning as a buyer if the conditions were desirable.

"Most members judged, in light of current conditions in the MBS market and the Committee's desire to normalize the composition of the Federal Reserve's portfolio, that it would be better to reinvest in longer-term Treasury securities than in MBS," according to the Fed minutes.

"While reinvesting in Treasury securities was seen as preferable given current market conditions, reinvesting in MBS might become desirable if conditions were to change."

as a result, demand for these bonds strengthened. it also helped that supply of these bonds was light. Risk premiums are 2 basis points firmer at 138 basis points over comparable Treasury yields.

meanwhile, the 4.2% rise in home prices from a year ago, according to S&P Case-Shiller Home Prices Index, was higher than forecast. Big surges in prices in New York, Chicago, D.C. and Los Angeles boosted the national average. However, the weak home sales data for July raises the prospect of weaker numbers going forward, analysts said.

Treasury prices rose Tuesday as the market benefited from month-end demand and lingering worries about the strength of the economic recovery. in recent trading, the benchmark 10-year note's price was 14/32 higher and its yield down to 2.481%. The 30-year bond was 28/32 higher and its yield down to 3.533%.

-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com

(Michael Aneiro, Deborah Lynn Blumberg, Prabha Natarajan and Anusha Shrivastava contributed to this article.)