Investment Bankers Must Be on Spring Break
New issue supply fell well short of demand to put money to work last week.
As we highlighted last week, if the new issue market didn't pick up enough to satisfy the demand from new money coming into the corporate bond market, spreads would continue to tighten, and tighten they did. Even though the S&P fell 0.5% and economic data was weaker than expected, the average credit spread in the Morningstar Corporate Bond Index tightened 2 basis points to +113. Treasury bonds firmed up, and the yield on the 10-year bond fell 4 basis points to 2.71%, recapturing much of the rise in rates from the prior week.
Investment bankers must have been on spring break. The new issue market was quiet and dominated by Bank of America's (BAC) (rating: BBB, narrow moat) $7.6 billion multitranche offering. If not for the B of A deal, it would have been the slowest week in recent memory. At a spread of 97 basis points over Treasuries, the 5-year tranche provided good value for investors, as we think fair value is +85. The 10-year notes were priced at +137, almost on top of our fair value assessment, and the 30-year was priced at +137, the same level as the 10-year. Within the sector, we have seen a number of instances where the spreads on the 10-year and 30-year bonds are equivalent, but we think there should be a 15- to 20-basis-point spread between the two, and as such think fair value for the 30-year bonds is +155.
David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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