Trading Activity Muted as Investors Await Earnings
Corporate bond trading activity was relatively light as many investors decided to wait for the calendar to build this week as reporting season ramps up.
Although most on-the-run names felt relatively flat last week, the Morningstar Corporate Bond Index tightened 2 basis points to +116. The amount of new issues priced last week in the investment-grade segment was respectable; however, since most U.S.-domiciled issuers are in their quiet period before they release fourth-quarter earnings, a significant portion of those that tapped the market last week were Yankee issuers. Trading volume was relatively light as many investors decided to wait for the calendar to build this week as reporting season ramps up. According to several syndicate desks, many issuers are planning on quickly coming to market after their earnings release. In the high-yield market, we are hearing that it's become a food fight for investors to obtain bonds from new issue allocations, as some deals are reported to be a ridiculous 10-15 times oversubscribed. The demand for high yield has continued to increase as investors reach for yield, pushing the credit spread of the Bank of America Merrill Lynch High Yield Master Index down to +387, its lowest level over the past few years. Combined with low interest rates, the all-in yield for this index is currently a paltry 5.36%.
In the secondary market, trading activity appeared to be picking up for bonds issued by Zions Bancorp (ZION) (rating: BBB-, narrow moat). Chris Baker, our bank sector credit analyst, published a note Thursday detailing why he thought the notes were attractive. While Zions' bonds are not for the faint of heart, Baker believes buyers of BBB bank paper should consider the 4.50% senior notes due March 27, 2017, which are indicated at 175 basis points above the nearest Treasury, or the Regions Bank 7.50% subordinated debt due in 2018, indicated at +161, as we believe these notes would be structurally senior to holding company debt in a Title II liquidation. Relative to where Zions' peers are trading and our view of the credit risk, we think both bonds are trading at attractive levels.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.