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Fed Plan Pummels Long-Term Corporate Bonds

Sunday, 14 November 2010 04:55 PM

Federal Reserve Chairman Ben S. Bernanke’s latest plan to stimulate the U.S. economy is pummeling investors owning the longest-maturity corporate bonds.

The price of 30-year debt from Northrop Grumman Corp., the largest U.S. Navy shipbuilder, has dropped 4.2 percent since Nov. 2, the day before the Fed’s announcement. Wal-Mart Stores Inc. bonds due in 2040 have slipped 3.6 percent in the period to about the lowest level since the Bentonville, Arkansas-based retailer sold the securities last month.

U.S. corporate bonds due in 15 years or more have lost 2.5 percent since the Fed committed to buying $600 billion of Treasuries, compared with a decline of 0.4 percent for the investment-grade market overall, according to Bank of America Merrill Lynch index data. That signals investors expect the Fed will succeed in bolstering growth and avoiding deflation, leading to higher interest rates.

Longer-dated debt is being hurt by the Fed’s policy of so- called quantitative easing, “particularly high-quality names that have issued at very tight spreads,” said Norval Loftus, chief investment officer of Allegra Asset Management in London. “Even the slightest hint that inflation could pick up is enough to send these names into a tail spin.”

Yields on debt due in 15 years or more have climbed to 5.81 percent, about the highest in more than three months, from a record-low 5.37 percent on Aug. 26, Bank of America Merrill Lynch index data show. Amid historically cheap borrowing costs, companies have accelerated offerings of the longer-dated bonds.

Entice Investors

Falling prices may entice investors seeking higher returns than Treasuries offer, said Burt White, chief investment officer at LPL Financial Corp. in Boston, which oversees $293 billion.

“You could see a decoupling as investors realize this is still a yield-starved market and you are getting very good yields from longer-dated corporates,” White said. “There is a point as prices move lower and yields move higher that these bonds become quite attractive.”

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debentures rose 1 basis point yesterday to 167 basis points, or 1.67 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Yields rose to 3.508 percent from 3.498 percent on Nov. 10.

The cost of protecting company bonds from default rose in the U.S. to the highest since Nov. 1. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.9 basis points to a mid-price of 93.3 as of 1:40 p.m. in New York, according to Markit Group Ltd.

Bondholder Protection

The index typically rises as investor confidence deteriorates and falls as it improves. Credit 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.

Stater Bros. Holdings Inc., the privately owned Southern California supermarket operator, plans to sell $255 million of eight-year notes as it seeks to buy back debt due in 2012. The securities may be priced as soon as today, according to a person familiar with the transaction. The senior unsecured debt will be privately placed, the San Bernardino, California-based company said in a statement distributed by PR Newswire that didn’t specify the timing of the sale.

Sales of longer-dated bonds are accelerating as companies lock in record low borrowing costs, according to data compiled by Bloomberg. Issuance this year of 30-year corporate debt has climbed to $80.6 billion, 52 percent of which has come since the end of June. That compares with $77.3 billion in the corresponding period of 2009.

Declining Spreads

The extra yield investors demand to own the longest- maturity U.S. corporate bonds has fallen 4 basis points to 197 basis points this month.

Time Warner Cable Inc., the second-largest cable operator by subscribers after Comcast Corp., PPL Corp. unit Kentucky Utilities Co. and Los Angeles-based Northrop Grumman are among borrowers that have sold $5.09 billion of 30-year bonds this month, Bloomberg data show. That’s the fastest start to a month since August, when issuance of the debt reached $14.2 billion.

The duration of investment-grade company debt, a measure of the securities’ price sensitivity to yield changes, reached 6.64 years in August, the highest since 1999, before falling to 6.43 years yesterday, Bank of America Merrill Lynch’s U.S. Corporate Master index shows. That compares with 5.64 years in October 2008, a month after Lehman Brothers Holdings Inc. filed for bankruptcy.

Rates Near Zero

The Fed has driven borrowing costs down by holding benchmark lending rates near zero and purchasing $1.7 trillion of long-term debt. The central bank said it planned about $75 billion of additional purchases a month through June and “will adjust the program as needed,” according to a Nov. 3 statement.

Yields on 30-year Treasuries rose for five straight days, the longest streak since July, after the Federal Reserve Bank of New York said 86 percent of the buying would target bonds coming due in 2.5 to 10 years.

That’s helped extend losses on the longest-maturity corporate bonds, which have declined 1.5 percent in November, falling for a third straight month after returning 4.49 percent in August, according to the Bank of America Merrill Lynch U.S. Corporates 15+ Years index.

Northrop Grumman

Northrop Grumman’s $300 million of 5.05 percent notes due November 2040 have slumped 4.2 cents to 96.66 cents on the dollar since Nov. 2, according to Trace, the bond-price reporting system of the Financial Industry Regulatory data. The bonds were issued Nov. 1 at 99.88 cents on the dollar.

The company’s $700 million of 3.5 percent notes due March 2021, sold the same day, have declined 0.55 cent to 99.2 cents since Nov. 2, Trace data show.

Wal-Mart, the world’s largest retailer, sold $1.25 billion of 5 percent, 30-year bonds on Oct. 18 as part of a $5 billion offering. The bonds have fallen 3.68 cents since Nov. 2 to 97.66 cents, Trace data show.

Northrop Grumman spokesman Dan McClain didn’t return a telephone call seeking comment. Wal-Mart’s Greg Rossiter didn’t immediately provide comment.

“There is a post-QE2 hangover,” said Perry Piazza, director of investment strategy at Contango Capital Advisors in San Francisco, who helps oversee about $2 billion of assets. “We’ve seen this increase in inflation expectations creep into a lot of markets.”

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Federal Reserve Chairman Ben S. Bernanke s latest plan to stimulate the U.S. economy is pummeling investors owning the longest-maturity corporate bonds.The price of 30-year debt from Northrop Grumman Corp., the largest U.S. Navy shipbuilder, has dropped 4.2 percent since...
Sunday, 14 November 2010 04:55 PM
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