Corporates: I’ll Never Turn to the Wide Side!

Corporate spreads are weaker this morning, finally. I’ve been feeling like a pull back is long over-due in corps. Beyond the general feeling, two interesting notes on today’s movement.

1) Recent new issue Dow Chemical is getting trounced. Dow’s 10-year (8.55 5/15/19) was priced on 5/7 at a spread of 525bps over the 10-year. Now the bid is +600. Most recent new deals have moved quickly tighter, anywhere from 15-50bps almost immediately.

2) Other new issues producing mediocre results. Bank of New York, BB&T, Morgan Stanley (MS), all basically at new issue levels. Again, most new issues have moved substantially tighter on the break. For what its worth, GE and Bank of America’s (BAC) deals are doing a little better, maybe 20ish tighter.

3) Today’s InBev deal isn’t going gang-busters either. Initially the price talk was “Low 300’s” and “Mid 300’s” for a 5-year and 10-year tranche. Recently when you’ve heard “Low 300’s.” that meant it would actually be +290. When you heard “Mid 300’s” that would actually be +325.

The deal actually will come at +337.5 and +375 respectively. So they actually had to widen this thing to get it sold. I don’t think its some kind of teetotaller conspiracy. I think the rally in corporate bonds is exhausted and its time to set up for a pull back.

Remember that when every one heads for the exits in corporate bonds, the Street won’t be taking on massive inventory to take customers out of their positions. So the pull back could be more violent than the economic outlook would indicate.

Among other new issuers today was Microsoft (MSFT), who sold bonds with a Micro spread of 105bps. Agencies were wider than that less than 6-months ago! Also Simon Property with their second offering this year, the other on 3/20. Worth noting that their March deal was sold at $97.5, now over $110. Coupon is going to be in the “high 7’s” as opposed to the 11% yield on the previous issue.

For those who care, I’ve recently put on a decent short on the S&P (shorted SSO mostly) expecting a pull back there. It makes me a little nervous that this seems like such a popular view, though.

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