By Katy Burne A credit rally driven by news of a bailout proposal for Spanish banks faded Monday after market participants became alarmed about the Spanish government's ultimate liability and how the bailout may affect contracts insuring against a government debt default.
European officials haven't yet said which rescue fund they will tap for the 100 billion euro ($125 billion) bailout, but, if they use the European Stability Mechanism, repaying the bailout loans to the ESM would have priority over Spain's other debts.
Some market participants worry such an arrangement, a form of subordination, may raise the chances of potential losses among private investors and force payouts on derivatives, called credit-default swaps, that protect the sovereign's debt. A trade body that decides on such matters in the CDS market, however, said such a trigger was unlikely.
In midmorning trade, the cost of protecting Spanish government bonds using CDS shot up, matching a record closing level from a week ago, and yields on Spanish 10-year bonds gapped higher in their biggest day-over-day move since early December.
The initial rally was predictable, said Suki Mann, credit strategist at Societe Generale, but "the lack of detail and issues surrounding bondholder seniority left the market wary."
Treasurys U.S. Treasury prices marched higher as investors turned sour on a deal they initially applauded to help bolster under-funded Spanish banks.
While the bailout news inspired some optimism coming out of the weekend, it soon cast a darker shadow on Spain's government finances and the broader euro-zone debt crisis. Market participants worried the financial aid only digs Spain further into debt. "A Spanish bank bailout short on details just wasn't enough to give the market any confidence," said Ray Remy, head of fixed-income trading at Daiwa Capital Markets America.
So after an initial bout of selling in Asia trading hours, U.S. Treasurys staged a one-way comeback with prices shooting higher throughout U.S. trading. By late afternoon, benchmark 10-year notes rose 13/32 in price to yield 1.593%. The 30-year bond gained 1 1/32 to yield 2.716%, while two-year notes stayed flat to yield 0.27%. Bond prices move inversely to their yields.
Corporates Rallying equity and corporate bond markets convinced eight companies to jump into the debt markets Monday, only to find the rally fizzle out by mid-morning.
The high-grade companies, including AT&T Inc. (T), CBS Corp. (CBS), and Symantec Corp (SYMC), offered at least $6.7 billion in bonds to a more cautious investor base than anticipated. And unlike Time Warner Inc. (TWX), which benefited from being the sole issuer Friday, they were competing for investor attention from an onslaught of supply.
"There were more deals than expected," said Vincent Murray, head of fixed-income syndicate at Mizuho Securities. "Everybody got in right away. It's all going to get done--the investors are just charging a little more."
Despite this, the $6.7 billion in volume marked a strong start to a week that was looking to absorb only between $10 billion and $15 billion. Last week, a greater-than-expected $15.4 billion was sold, according to data provider Dealogic, as issuers and investors alike were encouraged by the performance of newly issued bonds.
AT&T led the day with a $2 billion offering of five- and 10-year maturities. The five-year notes were offering 1.05 percentage points over Treasurys, and the 10-year notes--a reopening of an existing 3% coupon sale--a spread of 1.35 points.
Mr. Murray noted the short-dated pieces of new deals are garnering more attention, another sign investors are seeking safer assets.
Still, weakening sentiment didn't prevent CBS from increasing the size of its debt offering by $100 million, to $900 million. It sold five- and 30-year bonds to yield 2.191% and 5.018%, respectively, at spreads to Treasurys of 1.50 and 2.30 points.
Symantec, the security software company, sold $1 billion in five- and 10-year maturities to repay some convertible notes. They paid respective yields of 2.791% and 4.048%, or spreads to Treasurys of 2.10 and 2.45 percentage points.
UnionBanCal Corp., a California bank holding subsidiary of Mitsubishi UFJ Financial Group (MTU, 8306.TO), was out to sell $900 million in five- and 10-year maturities at respective spreads of 1.50 and 2.0 points.
Companies with smaller deals include NiSource Inc. (NI), Newell Rubbermaid Inc. (NWL), and PPL Corp. The New York Life Insurance Co. also sold floating-rate notes, pricing them at 0.12 percentage points over the three-month London interbank offered rate.
Municipal Bonds The prices of top-rated municipal bonds were unchanged Monday, according to a benchmark scale from Thomson Reuters Municipal Market Data.
The market spent the day digesting order periods for retail investors on several large deals being priced this week, MMD said.
Sales included a $2.7 billion Michigan Finance Authority sale, a $1.8 billion sale from the New York Dormitory Authority and $1.2 billion from Florida's Citizens Property Insurance Corp., said officials at Janney Capital Markets. The firm put new issue supply at more than $14 billion this week, well above the weekly average for the year.
Mortgages A solution for coping with credit rating downgrades on risky residential mortgage-backed securities following the financial crisis is coming back to haunt banks.
The market for re-securitized debt including residential mortgage bonds could come under significant pressure after the Federal Reserve last week finalized revisions to market risk-capital rules, pushing through changes that penalize investors who bought so-called "re-remics" that took existing RMBS and pooled them into new structures.
Re-remics is an acronym for "resecuritizations of real estate mortgage investment conduits" ["mortgage investment conduits" being the formal name for mortgage bonds]. The new structures offered top classes with greater credit protection, giving them higher ratings and making them palatable to risk managers.
The new capital rules go easier on many of the underlying securities, especially on the riskiest RMBS such as those backed by subprime and payment-option adjustable rate loans, according to J.P. Morgan Chase & Co. The RMBS market may benefit as dealers should be much more willing to provide liquidity on senior bonds when they need to hold less capital, said John Sim, a strategist at J.P. Morgan.
"This new formula is better across the board for RMBS, except for re-remics where there was a curveball," Mr. Sim said.
Cynthia Lin, Patrick McGee, Mike Cherney and Al Yoon contributed to this article.
Write to Katy Burne at [email protected]
European officials haven't yet said which rescue fund they will tap for the 100 billion euro ($125 billion) bailout, but, if they use the European Stability Mechanism, repaying the bailout loans to the ESM would have priority over Spain's other debts.
Some market participants worry such an arrangement, a form of subordination, may raise the chances of potential losses among private investors and force payouts on derivatives, called credit-default swaps, that protect the sovereign's debt. A trade body that decides on such matters in the CDS market, however, said such a trigger was unlikely.
In midmorning trade, the cost of protecting Spanish government bonds using CDS shot up, matching a record closing level from a week ago, and yields on Spanish 10-year bonds gapped higher in their biggest day-over-day move since early December.
The initial rally was predictable, said Suki Mann, credit strategist at Societe Generale, but "the lack of detail and issues surrounding bondholder seniority left the market wary."
Treasurys U.S. Treasury prices marched higher as investors turned sour on a deal they initially applauded to help bolster under-funded Spanish banks.
While the bailout news inspired some optimism coming out of the weekend, it soon cast a darker shadow on Spain's government finances and the broader euro-zone debt crisis. Market participants worried the financial aid only digs Spain further into debt. "A Spanish bank bailout short on details just wasn't enough to give the market any confidence," said Ray Remy, head of fixed-income trading at Daiwa Capital Markets America.
So after an initial bout of selling in Asia trading hours, U.S. Treasurys staged a one-way comeback with prices shooting higher throughout U.S. trading. By late afternoon, benchmark 10-year notes rose 13/32 in price to yield 1.593%. The 30-year bond gained 1 1/32 to yield 2.716%, while two-year notes stayed flat to yield 0.27%. Bond prices move inversely to their yields.
Corporates Rallying equity and corporate bond markets convinced eight companies to jump into the debt markets Monday, only to find the rally fizzle out by mid-morning.
The high-grade companies, including AT&T Inc. (T), CBS Corp. (CBS), and Symantec Corp (SYMC), offered at least $6.7 billion in bonds to a more cautious investor base than anticipated. And unlike Time Warner Inc. (TWX), which benefited from being the sole issuer Friday, they were competing for investor attention from an onslaught of supply.
"There were more deals than expected," said Vincent Murray, head of fixed-income syndicate at Mizuho Securities. "Everybody got in right away. It's all going to get done--the investors are just charging a little more."
Despite this, the $6.7 billion in volume marked a strong start to a week that was looking to absorb only between $10 billion and $15 billion. Last week, a greater-than-expected $15.4 billion was sold, according to data provider Dealogic, as issuers and investors alike were encouraged by the performance of newly issued bonds.
AT&T led the day with a $2 billion offering of five- and 10-year maturities. The five-year notes were offering 1.05 percentage points over Treasurys, and the 10-year notes--a reopening of an existing 3% coupon sale--a spread of 1.35 points.
Mr. Murray noted the short-dated pieces of new deals are garnering more attention, another sign investors are seeking safer assets.
Still, weakening sentiment didn't prevent CBS from increasing the size of its debt offering by $100 million, to $900 million. It sold five- and 30-year bonds to yield 2.191% and 5.018%, respectively, at spreads to Treasurys of 1.50 and 2.30 points.
Symantec, the security software company, sold $1 billion in five- and 10-year maturities to repay some convertible notes. They paid respective yields of 2.791% and 4.048%, or spreads to Treasurys of 2.10 and 2.45 percentage points.
UnionBanCal Corp., a California bank holding subsidiary of Mitsubishi UFJ Financial Group (MTU, 8306.TO), was out to sell $900 million in five- and 10-year maturities at respective spreads of 1.50 and 2.0 points.
Companies with smaller deals include NiSource Inc. (NI), Newell Rubbermaid Inc. (NWL), and PPL Corp. The New York Life Insurance Co. also sold floating-rate notes, pricing them at 0.12 percentage points over the three-month London interbank offered rate.
Municipal Bonds The prices of top-rated municipal bonds were unchanged Monday, according to a benchmark scale from Thomson Reuters Municipal Market Data.
The market spent the day digesting order periods for retail investors on several large deals being priced this week, MMD said.
Sales included a $2.7 billion Michigan Finance Authority sale, a $1.8 billion sale from the New York Dormitory Authority and $1.2 billion from Florida's Citizens Property Insurance Corp., said officials at Janney Capital Markets. The firm put new issue supply at more than $14 billion this week, well above the weekly average for the year.
Mortgages A solution for coping with credit rating downgrades on risky residential mortgage-backed securities following the financial crisis is coming back to haunt banks.
The market for re-securitized debt including residential mortgage bonds could come under significant pressure after the Federal Reserve last week finalized revisions to market risk-capital rules, pushing through changes that penalize investors who bought so-called "re-remics" that took existing RMBS and pooled them into new structures.
Re-remics is an acronym for "resecuritizations of real estate mortgage investment conduits" ["mortgage investment conduits" being the formal name for mortgage bonds]. The new structures offered top classes with greater credit protection, giving them higher ratings and making them palatable to risk managers.
The new capital rules go easier on many of the underlying securities, especially on the riskiest RMBS such as those backed by subprime and payment-option adjustable rate loans, according to J.P. Morgan Chase & Co. The RMBS market may benefit as dealers should be much more willing to provide liquidity on senior bonds when they need to hold less capital, said John Sim, a strategist at J.P. Morgan.
"This new formula is better across the board for RMBS, except for re-remics where there was a curveball," Mr. Sim said.
Cynthia Lin, Patrick McGee, Mike Cherney and Al Yoon contributed to this article.
Write to Katy Burne at [email protected]