JPMorgan Tightens Grip on Bonds as Sales Surge: Credit Markets

By Matthew Leising - Apr 3, 2012 12:33 AM GMT+0800

Article from Bloomberg

JPMorgan Chase & Co. (JPM) is tightening its grip on the global corporate bond market, taking share from Citigroup Inc. (C) and Bank of America Corp. (BAC) and topping all underwriters as companies sold a record $1.17 trillion of debt.

The most profitable U.S. bank’s underwrote 7.1 percent of all bond sales in the three months ended March 31, up from 6.5 percent in 2011, data compiled by Bloomberg show. Citigroup moved up two spots to second with 5.7 percent, the same amount it captured last year. Bank of America dropped to third with 5.6 percent, down from 6.1 percent in 2011. Deutsche Bank AG (DBK), which dropped to fourth from third, handled 5.5, down from 5.9.

JPMorgan is leading banks reaping the benefits of a Federal Reserve outlook that benchmark interest rates will hold near zero until at least late 2014 and an easing in Europe’s debt crisis that has bolstered confidence that default rates will stay below the historical averages. Increased demand for higher- yielding assets is allowing companies from Australia to Amsterdam to borrow at record-low rates.

“A real positive outcome on Europe kicked the market into high gear,” said Richard Zogheb, co-head of capital markets origination for the Americas at Citigroup in New York. He cited European Central Bank’s unlimited three-year loans to the region’s lenders and a restructuring of Greece’s debt as reassuring bondholders. “Investor demand has been incredibly strong,” he said.

Record Sales

The average bond yield for companies from the neediest to the most creditworthy is 0.15 percentage point from the record low 3.99 percent reached in October 2010, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield Index. Yields fell to 4.14 percent on March 30 from 4.17 percent a week earlier.

Corporate debt sales at a record start to the year are making underwriting one bright spot for Wall Street earnings. Mergers and acquisitions in the quarter fell about 14 percent from the fourth quarter, making it the slowest three-month period in 2 1/2 years, Bloomberg data show.

The largest U.S. banks will probably post a 10 percent decline in first-quarter fixed-income trading revenue from a year earlier and an 8 percent decline in equities trading, Keith Horowitz, a Citigroup bank analyst, said in a March 29 note.

Shrinking Spreads

Elsewhere in credit markets, benchmark gauges of corporate credit risk in the U.S. and Europe fell for a second day as manufacturing in the world’s biggest economy expanded at a faster pace in March. Hartford Financial Services Group Inc. (HIG), the insurer being pressured by investor John Paulson to break up, will pay about $2.43 billion to buy back debt and warrants issued to Allianz SE.

Bonds of oilfield-services company Weatherford International Ltd. were the most actively traded securities in the U.S. corporate market by dealers today, with 76 trades of $1 million or more as of 12:27 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Geneva-based company sold $1.3 billion of debt on March 30, Bloomberg data show. Its $750 million of 4.5 percent notes due in April 2022 gained 1.8 cents to 101.626 cents on the dollar today from an issue price of 99.855, according to Trace.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, fell 0.9 basis point to a mid-price of 90.5 basis points as of 12:26 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 1.3 to 123.6, Markit prices show.

Hartford Issuing

The indexes typically fall as investor confidence improves and rise 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 swap protecting $10 million of debt.

Hartford Financial plans to issue senior notes and junior subordinated debt as part of a strategy to improve financial flexibility, according to a statement today from the company, which is based in the Connecticut city of the same name. The U.S. firm turned to Allianz, Germany’s largest insurer, for capital in 2008, agreeing to pay 10 percent on $1.75 billion of debt as capital markets froze.

Hartford plans to sell 5.5-, 10-, and 30-year debt that may price today, according to a person familiar with the offering, who declined to be identified because terms aren’t set.

Corporate Bond Sales

In the corporate bond market, investors are scooping up the new debt as companies hold the most cash on their balance sheets in a decade. Cash held by companies in a JPMorgan investment- grade bond index increased 5 percent to $783 billion at the end of December from a year earlier, strategists at the bank said in a March 2 report.

“The fundamentals and the balance sheets look historically very strong,” said Brian Machan, a money manager with Aviva Investors North America in Des Moines, Iowa, who helps oversee $433 billion. “From an economic standpoint we’re still middling along, so corporations don’t want to leverage their balance sheet until we see recurring signs of economic recovery.”

Issuers rated Baa3 or higher by Moody’s and BBB- and above by S&P sold $347.5 billion U.S. dollar-denominated bonds in the quarter, the highest for investment-grade debt since the same period in 2009, when $376.3 billion was issued, Bloomberg data show.

High-Yield Bonds

Speculative-grade borrowers in the U.S. issued $95.2 billion of debt in the quarter, surpassing the $61.2 billion of combined issuance in the third and fourth quarters last year, Bloomberg data show.

Investors seeking the higher-yielding debt are emboldened by a global default rate for the riskiest borrowers that was 2 percent in February, compared with a long-term average 4.8 percent, according to Moody’s.

The quality of corporate borrowers is better than in past periods of large high-yield issuance, said Andy O’Brien, global co-head of debt capital markets at JPMorgan. Issuers with one or more rating of BB or higher made up 41 percent of the market last quarter, compared with about 25 percent in 2007, he said.

LyondellBasell Industries NV (LYB), the chemical maker that emerged from bankruptcy in 2010, lowered its rates on $3 billion of debt sold in two issues last month to 5 percent and 5.75 percent, compared with 8 percent and 11 percent for debt it’s seeking to repurchase with proceeds from the new bonds.

Citigroup Rebound

Investors last quarter shifted money out of low-risk, low- return assets such as money market funds and put some of that cash into credit markets, O’Brien said. According to JPMorgan global bond indexes, that caused yields on the debt of the highest-rated companies in the quarter to fall below 4 percent for the first time, he said.

“A lot of corporate issuers across the ratings spectrum rushed to the market to issue,” he said. “Several BB companies were even able to issue 5 percent money.”

Citigroup, which led global underwriting from 2007 to 1999, when Bloomberg began tracking the data, moved to second in the quarter in part because of new hires made in 2010 and 2011 to expand the business, Zogheb said. Those bankers include Stephen Trauber, the global head of energy investment banking, and Kevin Cox, the co-chairman of global industrials investment banking, he said. Citigroup hired both from UBS AG.

“Our investment in shoring up the banking ranks and filling some holes we had are really paying dividends,” Zogheb said. “There continues to be very strong demand for corporate debt products across all markets.”

One absent driver in the debt market during the quarter were mergers and acquisitions and leveraged buyouts, said Marc Gross, a fund manager at RS Investments, who oversees $3 billion in high-yield and loan funds in New York. With few bonds maturing in the next two years “to keep up this activity you’re going to need M&A,” he said.

With the improved credit markets, that’s likely to pick up, JPMorgan’s O’Brien said. “M&A activity is bound to pick up this quarter,” he said.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net

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

Article from Bloomberg

Get smart - the name is bond

April 1, 2012

Article from The Sydney Morning Herald

Between low-return deposits and high-risk shares, there's a third way, writes Mark Bouris.

THIS week I asked my Twitter followers where they would invest $10,000 to get a good return over 12 months.

The results weren't surprising. Almost two-thirds said they would invest in just three asset classes: property, shares or a savings account.

As a person who has worked in financial services for a long time, I noticed the glaring omission was government, bank and corporate-issued bonds - just 4 per cent of responses thought to invest in them.

Advertisement: Story continues below

I'm not pouring scorn on these choices - I think it's clear that people don't talk about bonds because they haven't been educated about them.

Simply, bonds are debts. When called a corporate bond, they represent a borrowing made by a company, which offers an interest rate to encourage you to lend to them.

Ironically, a bank-issued bond is very similar to a bank deposit. When you put your savings on deposit, you are literally lending money to a bank. Banks also borrow from big investors by issuing them bonds. As you can imagine, institutions frequently demand higher returns than you get on your savings accounts!

Bonds are an attractive savings destination for many big investors because they offer stable returns with relatively low risk.

For example, today you can get nearly 6 per cent a year on a senior-ranking, variable-rate bond issued by one of the big banks. And many of these investments are very liquid: you can put your money in and take it out whenever you want.

The rate of return you get on the bond is usually tied to how secure it is. This refers to the risk that you will not get paid your interest, much like the way banks think about the risk of you defaulting on a home loan.

If you can get better risk-adjusted returns on bonds, why is it so rare to be offered them?

The financial regulations say the standard minimum investment in a bond is $500,000, which means they are usually limited to the big end of town.

This is supposed to protect ''mums and dads'' from bad decisions. But it's actually unfair because none of you are stopped from buying far riskier bank shares or equities via an online stockbroker.

This is a point you need to understand. Doing so requires me to get back to basics.

Almost all businesses are made up of debt and equity. If you start a new business, you own that business and are the sole shareholder in it. That is your equity. But you might also borrow money from the bank, which is your debt. When a business fails, the shareholders bear most of the risk - they get their money last.

The same principle applies to a home. When you buy a house, you put in cash via a deposit. That is your equity. But you also typically take out a large loan from the bank. When your home's value rises and falls, so does the value of your equity. In contrast, the bank's return is the comparatively secure interest rate on its loan to you.

If you have to sell your house, the bank is paid in full - the equity is whatever is left over, if anything.

Now that you understand this, why shouldn't you be allowed to get access to the lower-risk returns associated with many high-quality bonds?

It's easy for you to buy shares in Westpac but near-impossible to invest in Westpac's AAA-rated covered bonds.

ANZ did retail investors a service by listing one of its bonds on the ASX recently (CBA has done something similar before). Because it is listed, you can buy and sell small parcels of it while getting an attractive 7.1 per cent a year return.

Buying an ANZ bond means you rank ahead of ANZ's shareholders. It's funny to think about it this way but when you invest in a bank's bonds, you are actually being a ''bank to the bank''. You are lending to the bank.

Another option is to invest in a fund or trust managed by professionals who specialise in investing in bonds. You can usually access these funds through a financial adviser.

This is going to be a big topic in the years ahead because retirees, near-retirees and even people in the ''accumulation'' phase of their lives need an alternative to our current bipolar investment world: you either get low-returning bank accounts or the high risk of shares. We need more middle ground.

Super funds have not been helpful in solving this problem. Before the recent crisis, the average ''default'' super fund was putting about 60 per cent to 70 per cent of your money into listed shares. You were being loaded up with risks you didn't need to take to meet your goals.

Get educated about bonds so you can save smarter.

Article from The Sydney Morning Herald

Bond fund investors ride out market’s bumps

Funds, ETFs hold up in quarter, but bulls face new challenges

March 30, 2012, 12:01 a.m. EDT
Article from Market Watch
By Rachel Koning Beals

CHICAGO (MarketWatch) – Is it possible to smoothly downshift this 30-year bond bull run?

Most bond investing experts claim yes, with a proviso: the easy ride hinges on buyers coming to terms with lower returns and rethinking what it means to take risk.

“You can no longer think of Treasurys as an investment, but only a safe-haven,” said Paul Nolte, managing director of investment manager Dearborn Partners. “We’ll probably know a lot more in four to six weeks but if the economy continues to look pretty good, you just have to venture into corporate bonds [or] emerging markets for any hope at investment returns.”

If the first quarter is any indicator, bond market behavior may finally reflect the “new normal” that Pimco’s Bill Gross and others first started talking about a few years back. In the first three months of 2012, long-dated government debt funds fell 5.5%, according to preliminary data from investment researcher Morningstar Inc. Shorter-term government funds were essentially flat.

So far this year, economic data has perked up and stocks posted solid gains. Bonds assumed an expected role, reflecting the “risk-on” approach. Emerging-market bond funds led all categories, with a 7% gain through March 28, according to Morningstar. High-yield bond funds were up 5.5% in the period, while higher-rated multi-sector corporate debt funds were up 4.1%. World bond funds rose 2.2%. In the tax-exempt space, national long-dated muni bond funds rose 2.9%, while high-yield muni funds gained 4.7%.

But the bond market has been fooled before. Each of the past two years started with outperformance of corporates and other higher-yielding areas, including stocks, only to see “investors run for the hills” and the relative safety of Treasurys in the middle of the year before a late-year scamper back to risk, Nolte said. On more than one occasion, lower-risk bond fund returns looked ready to crack and yet each quarter, they defied even expert expectations.

Stay in the lane

Is it different this time? Fund managers steered through the 2008 credit crisis and the still-lingering European debt malaise. Now, a slowing Chinese economy, spotty-if-improving U.S. growth and a volatile oil-price scenario raise concerns for the viability of riskier fixed-income categories. That includes lower-rated company debt and international bonds.

The Fed has pegged short-term rates at ultra-low levels and it’s buying longer-term paper to push down mortgage rates, but that program will run out in coming months.

In its attempt to stay a step ahead of the Fed, the bond market sold off in the early year. Treasury prices fell perhaps a little too fast. Falling prices push up yields as the market was pricing in higher future interest rates.

As the “new normal” camp made its case in recent years and again to start 2012, fund managers got a boost of confidence in their view from none other than Federal Reserve chief Ben Bernanke. He stepped in with an ABC evening news appearance and delivered a renewed pledge for low rates until late 2014. The market correction paused.

While Bernanke took to the airwaves, Rick Rieder, BlackRock’s chief investment officer of fixed income, fundamental portfolios, penned a column for The Financial Times to boost the bond bulls’ case:

“We have all heard the bears’ case for bonds: with governments and consumers in the developed world drowning in debt and negative real interest rates on many sovereign bonds, yields can only rise — quickly,” he wrote. “Not so fast: The confluence of profound supply and demand factors, with a dash of monetary policy distortion thrown in, will ensure bonds remain well-bid — and interest rates capped — for years to come.”

The reason? Supply, for starters. The U.S. bond market is smaller since the financial crisis. And, banks are issuing fewer bonds as they deleverage and cut risk under new regulations. Demand is another factor. Pension funds will remain buyers and will want a deeper bond mix to boost yield.

Rieder, who oversees some $615 billion in assets, ventures the only “bubble” in the bond market appears to be the “overinflated talk of bond market bubbles in recent years.”

Pick your spots

The fixed-income world’s guarded confidence hinges on the fact most tossed out the manual a while ago, no longer expecting bonds to behave a certain way and stocks to assume the counter position for a reasonable amount of time. Targeted domestic bond investing in search of yield, yet mindful of duration risk and credit quality, and a preference for emerging market paper over sovereign issuance are strategies that have paid off and may continue to do so.

“There’s an interesting dichotomy at work,” said Paul Matlack, U.S. fixed-income strategist with Delaware Investments. “The economic recovery may be touch-and-go but U.S. corporations are in the best shape they’ve been in for years.”

“Companies really cut to the bone, in fact probably over-fired in 2008 and shuttered plants. Now, profitability has skyrocketed. They’re refinancing debt. Large companies now have tremendous access to bank capital and the debt markets,” he said.

Morgan Stanley Smith Barney is taking a tactical approach. The firm’s analysts believe that developed-market central-bank policy rates are likely to remain low for years, a third round of Fed Quantitative Easing could be likely later this spring, and that the European Central Bank’s QE equivalent has been a success.

Meanwhile, a few emerging market central banks have already begun easing to offset slower developed-market growth. The firm is overweight cash, short-duration bonds, investment grade bonds and managed futures. It suggests an underweight to developed-country sovereign debt, high yield bonds, equities, commodities, global real estate investment trusts and inflation-linked securities. Emerging-market bonds receive a market-weight.

Pimco favors high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity products.

Once again managers are hopeful they won’t yet have to toss out the “new normal” label — ultra-low overall rates and improved corporate conditions. The bigger challenge appears to be conditioning investors to think about bonds differently than they have for decades.

Gross put it this way in his latest commentary: “Total return as a supercharged bond strategy is fading ... As we delever, it will be hard to deliver what you have been used to. Should you desert bonds simply because they may return 4% as opposed to 10%? I hope not.”

Rachel Koning Beals is a Chicago-based freelance writer. 

Article from Market Watch