Bloomberg News

Bond Trading Least Since 2008 as Dealers Retreat: Credit Markets

August 03, 2012

Bond Trading Least Since 2008 as Dealers Retreat

ArcelorMittal’s $1.4 billion of 4.5 percent notes maturing in February 2017, which traded as high as 101.2 cents on the dollar in May, dropped 4 cents to 95.06 cents, Trace data show. Photographer: Vincent Mundy/Bloomberg

Investors are stockpiling corporate debt rather than trading as banks retreat from bond brokering, with daily trading volumes in the U.S. slumping to the slowest July in four years even as offerings reached a record.

Volumes averaged $9.97 billion last month, 8 percent below July 2011 and the lowest for the period since two months before Lehman Brothers Holdings Inc.’s failure ignited the credit crisis, according to Financial Industry Regulatory Authority data. Investment-grade sales rose 58 percent from the same month last year to $80.5 billion, data compiled by Bloomberg show.

Fund managers are struggling to pry loose bonds in the secondary market as new regulations to curb risk fuel an 82 percent decline in corporate-bond inventories at primary dealers since 2007. Issuance is failing to satiate investors who have plowed $63.5 billion into investment-grade bond funds this year, seeking alternatives to government debt as the Federal Reserve holds benchmark interest rates near zero through at least 2014.

“There’s such an imbalance between supply and demand right now, investors aren’t willing to part with what they own,” said Jonathan Fine, Goldman Sachs Group Inc. (GS:US)’s head of investment- grade syndicate for the Americas in New York. “They’re just focused on getting new product through the door.”

Primary Dealers

The 21 primary dealers that trade directly with the Fed have curbed trading of company bonds in the U.S. by 61 percent to an average volume of $107.9 billion in the week ended July 25 from the peak of $278.6 billion in June 2007, according to Fed data. Their holdings of the debt plunged to $37.5 billion as of July 11, the least since March 2002.

“There’s been a general decline in liquidity over the past few years, since the end of the financial crisis,” said Alex Gennis, a credit strategist at Barclays Plc (BARC) in New York. “The expectation is that liquidity will continue to deteriorate.”

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell by the most in a week after a report showing payrolls climbed more than forecast.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, fell 4.2 basis points to a mid-price of 104.8 basis points as of 9:10 a.m. in New York, according to prices compiled by Bloomberg. That’s the biggest drop since July 27.

Rate Swaps

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

The payrolls increase of 163,000 followed a revised 64,000 gain in June that was less than initially reported, Labor Department figures showed today in Washington. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. Unemployment rose to 8.3 percent.

The U.S. two-year interest-rate swap spread, a measure of bond market stress, fell 0.4 basis point to 21.25 basis points as of 9:10 a.m. in New York. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.

Bonds of ArcelorMittal are the most actively traded dollar- denominated corporate securities by dealers today, a day after the company’s debt rating was cut to junk by Standard & Poor’s, with 19 trades of $1 million or more as of 9:11 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Trading Slowing

The world’s biggest steelmaker’s long- and short-term ratings were cut to BB+/B from BBB-/A-3 by S&P, which cited uncertainty about its debt reduction plan and a weakening steel industry. Luxembourg-based ArcelorMittal said the downgrade was driven by a change in S&P’s view of the “macro-economic environment.”

ArcelorMittal’s $1.4 billion of 4.5 percent notes maturing in February 2017, which traded as high as 101.2 cents on the dollar in May, rose 1.2 cents to 96.25 cents on the dollar as of 8:58 a.m. in New York, up from the lowest level since they were sold in February, Trace data show.

Bond trading is slowing as rules from the U.S. Congress to the Basel Committee on Banking Supervision prod the biggest banks to pare holdings of corporate bonds. Primary dealer company-debt holdings of $41.2 billion as of July 25 compare with a peak of $235 billion in October 2007, Fed data show.

“Even if the dealers were actively stocking inventory, their inventories would still be low because the demand on the buy-side is so high,” said Scott Kimball, a money manager at Taplin Canida & Habacht LLC, a BMO Financial Group unit that oversees $7.2 billion. “Whatever inventories they have would be purchased.”

Treasury Yields

Volumes slumped even as the amount of investment-grade corporate debt grew 48 percent in four years to a combined face value of $3.76 trillion, according to the Bank of America Merrill Lynch U.S. Corporate Master index.

Borrowers sold a record amount of dollar-denominated investment-grade notes in July as investors poured almost 13 times more cash into funds that buy the debt this year compared with the first seven months of 2011, according to Cambridge, Massachusetts-based EPFR Global.

“The only real source of credit for the buyside is the new issue market,” said Fine of Goldman Sachs. “We’re seeing very little demand to trade those bonds in the secondary market.”

Corporates are luring investors with yields on benchmark 10-year U.S. Treasury notes sinking as low as 1.38 percent on July 25. That compares with 3.065 percent on investment-grade company bonds in the U.S. as of Aug. 1, according to Bank of America Merrill Lynch data. Corporate yields fell to an unprecedented 3.037 percent on July 30.

Texas Instruments

The Fed says it plans to hold its target rate for overnight loans between banks in a range from zero to 0.25 percent through at least late 2014 with unemployment holding above 8 percent for a 42nd straight month in July.

The central bank has reiterated its willingness to deliver more stimulus measures if economic conditions fail to improve as the International Monetary Fund lowers its 2013 global growth forecast to 3.9 percent from the 4.1 percent estimate in April.

Texas Instruments Inc. and Unilever NV sold bonds last week with record coupons of 0.45 percent on three-year notes, Bloomberg-compiled data show. Texas Instruments sold $1.5 billion of debt in the Dallas-based company’s first offering in more than a year with equal $750 million portions of three- and seven-year bonds.

Unilever, the world’s second-biggest consumer-goods maker, behind Procter & Gamble Co., issued $450 million of three-year notes and $550 million of five-year debentures. The maker of Dove soaps and Ben & Jerry’s ice cream last sold dollar debt in February 2011, Bloomberg data show.

“Demand is extraordinarily high,” Fine said. “Investors need that product, they have an acute shortage of product, they’re looking for any product. Everyone is in the same position.”

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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