Goldman Sachs, Bank Of America Spreads Widen With Bank Paper Still Out of Favor

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Treasury prices slumped Tuesday following several favorable economic reports, and while it was not good news to see retail sales decline during May, there was a huge sigh of relief that the report was not as dire as predicted ahead of its release. The yields at the 10-year maturity climbed to 3.07%, leaving them well clear of the 3% hurdle while financial issues also continued to suffer even as most banks share prices joined in the rally. One major exception was Bank of America as the lender remains in the doghouse following the finding that it hindered a government inquiry over foreclosure practices by delaying and refusing to offer appropriate materials.

Investment Grade –

Goldman Sachs – Spreads at banks widened versus treasuries as corporate bond prices fell harder than government securities. A reminder of the cooler attitude towards the banking sector came Tuesday from Fitch ratings who noted that the total value of loans on banks’ balance sheets had contracted for 11 consecutive quarters to levels last seen in 2006. Naturally that’s not such a good sign for investors looking for growth in earnings stemming from an artificially depressed yield curve thanks to the Fed’s strong-arm tactics. Banking paper continues to trade weaker as investors look for alternatives. Goldman’s June 2020 maturity traded with a loss of around $1.75 per $1,000 invested forcing its premium to treasuries from 180 basis points to 196 basis points as fixed income investors did battle with a modest dip in retail sales.

Bank of America – While the broad-based S&P 500 index might have advanced by 1.5% on Tuesday, shares in bank of America continued to languish following the government’s finding that the nation’s largest housing lender had “significantly hindered” a federal review of home loan foreclosures insured by the Federal Housing Administration. Shares in the company are adrift of the benchmark by 2.3% today while investors selling its August 2016 bonds drove the yield 15 basis points higher to 4.08%. The paper was second-most actively traded on volume of $38mm. The issue continues to underperform the broad market with the premium over treasury securities now having widened from 200 basis points on June 1 to 240 points today.

Non-Investment Grade –

MGM Resorts International – A three-week slide in its shares resulting in a 22% loss of market capitalization at the resort-provider has raised its appeal according to a couple of analysts watching the name. On Monday Bernstein raised its view from ‘market perform’ to ‘market outperform’ while on Tuesday Citadel raised its outlook from ‘neutral’ to ‘add.’ Its Caa1-rated paper maturing April 2013 was well sought after on Tuesday with buyers hunting around for about $12mm of the issue. The 5.29% yield tightened relative to treasuries by eight basis points on the day leaving the spread at 586 basis points above government short-dated paper.

For live corporate bond pricing and current inventory please see Bloomberg page IBCO<GO>.Customers can access Interactive Brokers corporate bond offering through their Trader Workstation platform. For clients wanting more market color or inventory details please contact Jesse Muscarello in the New Jersey office at 201-946-5431.

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com