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CREDIT MARKETS: High-Grade Issuers Active Ahead Of Second Half
Dow Jones, 30th June 2010

High-grade issuers took center stage Wednesday, bringing over $4 billion in new paper to the market, even as credit investors took a cautious approach given the month, quarter and half-year end.

All four investment-grade deals were well received and two high-yield sales were tabled, but only one--for Insight Communications--had been completed by press time.

The timing of the issuance was surprising, some observers said. "If someone says rates are stable and we can slip in issuance in this quarter, the timing might make some sense, but as far as the markets go we are still walking on thin ice," said David Ader, head of interest rate strategy at CRT Capital in New York.

David James, vice president in fixed income at broker-dealer Wall Street Access, said others might be tempted to come to market Thursday, but that Friday would be quiet going into the holiday weekend.

"You won't see anything now until after July 4, except maybe one or two deals," he said.
Investment-Grade Bonds
Fears about Europe's sovereign debt crisis and lackluster U.S. jobs data kept credit investors on edge and eager for signals of any further bad news in the form of non-farm payroll data on Friday.

"People are expecting a disappointing number on Friday, and if that number merely comes close to expectations, I think the market can potentially have a bit of a relief rally," said Derrick Wulf, portfolio manager at Dwight Asset Management in Burlington, Vt.

The recent rush into Treasurys does not fully explain the credit picture among U.S. borrowers, Wulf added. "The fact of the matter is that credit fundamentals in the U.S. are still very sound. Companies have cash on their balance sheets and remain profitable."

Wal-Mart Stores Inc.(WMT) sold $3 billion in senior unsecured five-, 10-, and 30-year notes; Campbell Soup Co. (CPB, A2/A/A) sold $400 million in seven-year senior unsecured notes; and Fidelity Investments' (FMR LLC, A2/A+) sold $400 million in 30-year senior unsecured notes.

Wal-Mart's five-year, $750 million tranche had a 2.25% coupon and priced at 53 basis points over comparable Treasurys for a yield of 2.315%; the 10-year, $1.5 billion notes had a 3.625% coupon and sold at 70 basis points over Treasurys for a yield of 3.636%; and the $750 million of 4.875%, 30-year bonds priced at 108 basis points over Treasurys for a yield of 4.974%. The long-term notes priced well below preliminary guidance of 115 basis points.

Campbell Soup's seven-year bonds had a 3.05% coupon and priced at 65 basis points over comparable Treasurys for a yield of 3.096%.

Fidelity's $400 million, 6.544% senior unsecured bonds due 2040, upsized from an initial $250 million, priced with a spread of 262.5 basis points over Treasurys.

Elsewhere, REIT Digital Realty Trust privately placed $375 million of 4.5% notes priced at 275 basis points over Treasurys for a yield of 4.568%.

Big U.S. banks were the winners in the secondary market. Bonds among financial institutions were the most actively traded Wednesday, and risk premiums improved in the sector after allotments from the European Central Bank's three-month funds were lower than expectations.

Also helping banks was a delay in the push to overhaul financial regulation. The Senate said it will not vote on the pending reform legislation this week as Democrats originally had hoped, instead preferring to wait until after the July 4 recess.

Risk premiums over Treasurys on Bank of America's (BAC) 5.625% notes due 2020 tightened 0.08 percentage points; the spread on Goldman Sachs' (GS) 6% notes due 2020 narrowed 0.06 percentage points; and J.P. Morgan Chase's (JPM) 3.4% notes due 2015 improved 0.05 percentage points, according to MarketAxess.

Markit's CDX North American Investment-Grade index, a barometer for investor confidence, gave up the day's gains along with stocks. The index was quoted 1 basis point worse at 123.2BP as of 4:11 p.m. EDT.
Junk Bonds
The U.S. high-yield bond market was poised to wrap up the second quarter in a much more subdued mood after the euphoria of the first three months of the year.

At $515 billion, issuance is only slightly above the $478 billion in the fourth quarter, when the market was at a standstill as companies and investors waited to see whether the economy would rebound in early 2010. It is significantly below the $696 billion in the first quarter, according to data provider Dealogic.

Insight Communications sold $400 million in 8-year senior notes at par to yield 9.375%, according to people familiar with the deal. The cable provider plans to use the proceeds to fund a payout to shareholders. And CKE Restaurants planned to sell $600 million in senior secured second-priority notes due 2018, but hadn't priced the deal Wednesday evening.

Those two deals are the only remaining notes set to sell this week going into the Independence Day weekend.

In leveraged loans, Vertafore is in the market with a $625 million credit facility to fund its leveraged buyout by TPG Capital. The deal, run by Barclays Capital, Bank of America Merrill Lynch and Credit Suisse, includes a $550 million 6-year term loan and a $75 million revolver, according to people familiar with the deal. The bank meeting is scheduled for July 8.
Asset-Backed Securities
More than $5.326 billion of asset-backed securities are expected to be sold before investors break for the holiday weekend.

"New deals are being pushed through before" the weekend, said James Harrington, an investor in these bonds. "A lot of firms don't like to make commitments over month/quarter end."

The deal flow was spread through all loan sectors--autos, credit cards and student loans.
CarMax, the used car retailer, has a $650 million issue with six classes. The largest triple-A rated tranche, of $249 million size, sold at 35 bps over swaps, at a yield of 1.415%.
Mortgage-Backed Securities
Agency mortgage bonds performed poorly for the second day in a row. Some supply started entering the market as more homeowners looked to refinance their homes. However, the lack of buyers at the current high prices on these bonds, is pushing risk premiums to wider levels of 4 basis points or 140 basis points over comparable Treasurys.
Treasury securities were the most sought-after U.S. fixed-income asset in the second quarter, as rising worries about the economic outlook and euro-zone debt problems drove investors into safe-haven assets.

As of Tuesday, the Treasurys market has handed investors a return of 4.62% so far this quarter, lifting its gain this year to 5.79%, according to data from Barclays. In contrast, for the whole year of 2009, Treasurys suffered a loss of 3.57%.

Long-dated Treasurys were the best of the bunch. Treasurys with maturity due in more than 20 years have handed investors a whopping 14% return this quarter, while those maturing from 10 years to 20 years have returned 9.27%, according to Barclays.

As demand for Treasurys surged, their yields tumbled. The 10-year note's yield, the benchmark for consumer and corporate borrowings, has dropped more than 100 basis points from this year's 4.017% peak set in early April. For the quarter, the yield was down by more than 80 basis points.

"The plunge in yield tells you that the bond market has priced [itself] out of a strong recovery," said Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $9.3 billion in assets.

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