Borrowers jumped into the US high grade bond market this week to take advantage of a strong rally in US Treasuries that took yields below 5%.
The 10 year Treasury rallied to 4.87%, its lowest level since April, while the 30 year hovered around the 5.01% area yesterday (Thursday) afternoon.
Fuelling the rally this week were benign US consumer and producer price inflation numbers, which some economists believe have given the US Federal Reserve good reason to defer rate increases for the rest of the year.
"The inflation data have come as close to taking the Fed out of play now as at any other time during this two year old tightening cycle," said David Rosenberg, North American economist for Merrill Lynch in New York.
Although that meant a fall in all-in yields, investors were still on the hunt for longer dated fixed rate paper now that rate hikes looked like being on hold.
Citigroup and HSBC obliged with 30 year subordinated notes. Yesterday Citigroup was able to increase its $1bn 2036 subordinated deal to $1.5bn and price it at 114bp over Treasuries, in the middle of its 113-115bp guidance.
HSBC Holdings also came to market on Wednesday with a reopening of its 6.5% 30 year subordinated issue for an additional $400m at 125bp over Treasuries.
Citi and HSBC's deals were attractively priced and traded well, with the HSBC deal tightening to 121bp yesterday.
Although it was the middle of August, underwriters had no trouble finding demand for deals. "The market is in decent shape," said one banker in New York. "We continue to see an active new issue calendar, although some deals had to come with concessions and even restructurings to get done."
Expedia shortens duration
He was referring to Expedia, the online travel agency, which was forced to change its $800m proposed 10 year bond into a $500m 12 put four year deal. The bond kept its original spread level of 262.5bp over Treasuries.
Leads JP Morgan and Lehman Brothers had to find common ground between an issuer on analysts' lists of LBO targets that steadfastly refused to include change of control provisions, and an investor group demanding protection from rating changes.
In its original structure the deal attracted only about $400m-$500m of demand. Many accounts thought $800m was far too big a deal for the size of the company.
But the book built to $1.1bn after the leads made the structure shorter in duration by embedding a put option, while still keeping the spread the 10 year had carried.
Expedia accepted the changes because they meant it could spread its deal over a lower yielding seven year Treasury note.
In spite of its teething problems, the bond tightened 30bp in the secondary market, proving that investors, while cautious about record tight spreads and the possibility of deteriorating credit quality, will jump in and buy if the terms are attractive enough.
The Expedia deal's only real comparable in the market was the $400m 10 year bond issued by Sabre Holdings, the online travel business that owns Travelocity. That deal was priced in March at 167bp over Treasuries, but only because Sabre included a coupon step-up if its ratings dropped in the event of a change of control.
That deal was trading around 215bp bid earlier this week, making Expedia's 262.5bp for a 12 put four year look attractive.
Seeing the difficulties Expedia had to deal with, Cintas Corp, the work uniforms maker, added change of control language to its $250m 30 year bond, launched yesterday afternoon.
Led by Keybanc, the deal gives investors the option to put the bonds at 101.00 if Cintas is taken over.
The deal had been announced on Tuesday but was delayed for a day for the issuer and lead to discuss whether to include the change of control covenant.
Bankers expect the next two weeks to be quiet as traders and investors take holidays before the Labor Day long weekend at the beginning of September, which marks the official end to summer.
