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CREDIT MARKETS: DriveTime Sells First Junk Deal In A Week
Dow Jones, 27 May 2010

Most people had checked out of the corporate markets for the weekend by midday Thursday, and the resulting few bids kept corporates from stabilizing going into the Memorial Day holiday.
 Investment-Grade Corporates 
Activity in the high-grade corporate bond market was measured Thursday, as most desks were half staffed in anticipation of the extended holiday weekend. The Securities Industry and Financial Markets Association (SIFMA) has recommended an early close at 2:00 p.m. EDT for May 28 for the trading of U.S. dollar-denominated fixed-income securities in observance of the Memorial Day Holiday.

The primary slate was bare this session, after $9 billion in new issues were sold Wednesday.
Risk premiums were mixed in the cash markets.

Trading conditions were "sloppy" as bids continued to fade and volume remained panifully thin, according to Rich Lee, managing director of fixed income at broker/dealer Wall Street Access.

He had expected a stabilization in spreads this morning, but didn't find it. "It's hard to pinpoint cause of movement in such a thin market," he said.

To be sure, Goldman Sachs 5.375% bonds due 2020 were 12 basis points stronger at 253 basis points over Treasurys, while Bank of America Corp. (BAC) 7.625% bonds due 2019 were weaker by three basis points at 244 basis points over Treasurys, according to MarketAxess.

Meanwhile, the benchmark high-grade credit derivatives index, the Markit CDX North America Investment Grade derivatives IG14 index, was significantly improved on stronger earnings that helped to offset disappointing U.S. Q1 GDP figures, according to Gavan Nolan at Markit. The index was last quoted better by 9.2 basis points at 114.7 basis points.

Junk Bonds 
DriveTime Automotive downsized to $163 million its seven-year senior secured notes in a deal led by Jeffries. That deal was on road show until Thursday, and priced early at what was said to be a 12.875% yield, with a possible discount of 1 to 2 cents on the dollar for initial buyers. It was originally slated to be $200 million.

The bond sale was the first in a week. Companies have withheld deals from the market in the recently volatile days and are likely to sell more after the long weekend if the markets seem more positive, several investors said.

The high-yield market was still awaiting the pricing of $250 million in six-year second-lien notes from Willbros Group, an energy company that's acquiring an electic power and natural gas company. Books closed on the UBS-led deal at 1 p.m. Thursday in New York. It was expected to sell for a 12% yield, according to people familiar with the deal.

Agency Debt 
Freddie Mac (FRE) priced its blockbuster $6 billion two-year note Thursday, according to a person familiar with the matter.

The 1.125% note priced at 29 basis points over comparable Treasurys to yield 1.163%.
Joint leads on the deal are J.P. Morgan Chase, Citigroup Global Markets, and Goldman Sachs & Co.

Demand for the note was strong, industry participants said.

"They haven't issued anything in a while so they were due for a new issue," said Michael Chang, interest rate strategist at Credit Suisse. "There is definitely a lot of demand for agency debt in the front end."

Freddie had last issued a $6 billion note on May 21, 2009. That was a three-year bond.

Commercial Paper 
The U.S. commercial paper market shrank yet again on both a seasonally adjusted and unadjusted basis in the week ended May 26, according to Fed data released Thursday. This week, the short-term market shrank by $2.6 billion after decreasing by $27 billion on a seasonally adjusted basis a week earlier. On an unadjusted basis, it fell by $9 billion, after shrinking by $23 billion the previous week. Overall, the market is now at $1.073 trillion in size on a seasonally adjusted basis, substantially down from a peak of $2.2 trillion in July 2007.

The tone in the asset-backed commercial paper market is "better," said a trader at a primary dealer. "There's a lack of supply and we can't get enough trades done," he said, noting Thursday he worked on several transactions where the debt matures in three months.

Investors had been buying shorter-term paper but that seems to be changing now, he said. "Issuers are lowering rates at the longer end," he added.
 
Treasurys 
Treasury prices fell Thursday, pushing long-term yields sharply higher, as worries over the euro zone's sovereign debt crisis eased, denting haven-seeking flows into low-risk U.S. government debt.

Riskier assets including stocks and commodities posted strong gains as the euro rebounded against the dollar after officials from China, which holds the world's largest amount of foreign reserves, denied media reports that it is reviewing its plan for euro-denominated bond holdings.

The improving sentiment tempered demand for a $31 billion seven-year note auction.

As of 3:55 p.m. EDT, the 10-year note was 1 2/32 lower, with the yield up 12.7 basis points at 3.346%, and the 30-year bond was 2 9/32 lower, pushing up its yield by 13.1 basis points to 4.247%. The seven-year note was down 22/32, with its yield up by 10.8 basis points at 2.785%.

Bond yields move inversely to prices.



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