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Caution Back in Vogue
Euro-Zone Concerns Keep Many Companies Out of Market
The Wall Street Journal, 12 May 2010

Credit investors resumed their wary posture Tuesday as markets softened and few new issuers dared test investor demand despite low benchmark yields.

Financial-sector bonds—which have been the bellwether for the investment-grade corporate market—weakened, while the high-yield market pared some of the gains made on Monday, when risk appetite seemed to return following last week's extreme volatility.

"The tone seems better, but it's still cautious," said Sabur Moini, portfolio manager at Payden & Rygel in Los Angeles. "You have the question of whether the Greece bailout package is sufficient or will problems keep popping up with Spain and Portugal."

New corporate-bond issuance is suffering in May, as investors remain skittish and companies are hesitant to bring new notes to a market that has been highly unpredictable.

The lone investment-grade issue in the market Tuesday was a $2 billion offering from Enterprise Products Operating LLC. Much smaller issues came to the high yield market from Skillsoft, Hillman Group and MDC Partners.

"Current market volatility is working against issuers who need to pay up to get deals done," said Richard Lee, managing director of fixed income at Wall Street Access.

Enterprise Product's deal was a case in point: the 10-year piece was sold at 1.70 percentage points over comparable Treasurys, above the initial price guidance of 1.50 points.

Investment-grade issuance has experienced its slowest start for any month on record, according to data provider Dealogic. Total May junk-bond issuance of $1.7 billion is sharply lower than the $8.2 billion at this same point in May 2009, and well off the record-setting pace seen in March and April 2010, when each month brought more than $30 billion in high-yield issuance.

Debt problems in Greece and other euro-zone nations remain the greatest cause for concern for U.S. credit investors, who were encouraged Monday by the European Central Bank's newfound willingness to intervene in debt markets.

"If you think of Europe as a similar problem [as Lehman Brothers in 2008] but with over-leveraged countries instead of over-leveraged banks, by having the ECB use some quantitative easing it heads off deflation and improves the liquidity situation," said Andrew Feltus, portfolio manager at Pioneer Investments.

The euro zone's sovereign-debt problems supported the Treasury's three-year note sale, as many investors sought the safety of the dollar and U.S. government securities. The $38 billion sale in three-year notes was $2 billion less than last month's sale, as an improving economic outlook and tax receipts are allowing Treasury to cut auction sizes for the first time since 2007.

"We believe the flight-to-quality bid has not completely dissipated," said George Goncalves, head of U.S. interest-rates strategy at Nomura Securities International in New York. "With the euro under question as the alternate reserve currency, central banks should keep three-year auctions well-bid in the near future."

Late Tuesday, the benchmark 10-year note was steady for a yield of 3.541%, while the two-year note was also flat for a yield of 0.856%. The existing three-year note was up 2/32 point, or $0.625 for every $1,000 invested, for a yield of 1.338%. That is down from 1.357%, as yields fall when prices rise.

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