Family Dollar Corporate Paper Advances

Bond prices remained firm at the end of a week in which yields on government securities traded at their lowest for 2011. A report showing a slide in home sales contracts awaiting signature reminded investors that the U.S. economy faces a prolonged period of adjustment ahead. Yields further softened in to the weekend after the 12% plunge in contract signings and as sales were depressed by the weight of foreclosures. With unemployment expected to remain close to 9% by the end of the year investors again realizing that monetary policy is on permanent hold once again looked favorably on corporate issues where room for narrowing spreads remains a distinct possibility.

Investment Grade

Family Dollar Stores Inc. (FDO) – They used to say that the dollar-store trades had become too crowded meaning that too many hedge funds and analysts had poured money into value plays likely to benefit from the recession and as consumers faced a crimp on their incomes. I remember they used to say that when shares in Family Dollar burst in to the $30-plus range in 2009. Most traders were forced to abandon that trade on a protracted descent back to $25 but with shares putting in a fresh all-time high on Thursday, you can bet your bottom dollar they wish they’d stood by the retail discount outlet. Family Dollar yesterday reached $56.90 per share, while this morning its February 2021 10-year maturity appears well bid, admittedly in a thin market. Still buyers appeared to be taking the 5% issue on board at the end of the week perhaps given its share price performance coupled with its bottom-of-the-rung investment grade rating of Baa3. Perhaps bond buyers are looking for those companies with solid earnings potential combined with possible capital appreciation should yield spreads further compress. So far $24mm worth of this issue has changed hands on Friday with the yield trading at around 5.13%. The outstanding tranche when issued is $300mm.

High Yield

The McClatchy Co. (MNI) – The sale of 14 acres of Miami real estate catapulted shares in McClatchy, which owns and operates media subsidiaries including the Miami Herald newspaper. The sale includes a provision to allow the Herald to continue operating rent-free for a period of up to two years. Shares in the media giant had more than halved from $5.60 as recently as late January following the expiration of land deal that would have sold 9.4 acres of the sight. At the best point of the day its shares had surged by 16% to reach $3.20. Buyers of McClatchy’s February 2017 paper came out of the woodworks in light of the closure of the reported deal. The sale generated a much-needed $236 million and probably encourages bond investors looking at the potential for further gains in its B1-rated corporate paper. On Friday $26mm changed hands with buyers advancing the price of $1,000 face value by 87 cents as the yield eased to 9%.

Macy’s Inc. (M) – Paper issued by retailer Macy’s has had a stellar run of late, in part because the underlying bond market has proved bullish as yields fell to year-to-date lows. Aside from broad market gains, Macy’s July 2034 has become increasingly appealing to longer-dated bond buyers. In the space of the last two weeks the price of the Ba1-rated issue has advanced by $10 per $1,000 face value as investors swarmed all over the fashionable issue. The issue last changed hands at its par value of 100 on May 11, before commanding a price of 110 yesterday. Heading in to the weekend buyers snapped up a further $7mm of this issue lowering its yield to 6.15%.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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