Government bond yields advanced towards record low yields on Friday as investors baulked at the stock market. There were few reasons to sell based on President Obama’s speech to the joint houses on Thursday evening at which he unveiled a $447 billion stimulus package. The risks of further political head-butting is naturally a risk, but there’s little Obama can do about the rising tensions across the Atlantic where the announced resignation of the ECB’s top economist sparked further concerns that a Greek default is just a matter of time away. With U.S. stocks clearly feeling the weight of a thump down to earth for Eurozone issues, investors had a hard time keeping up with a rally in treasuries as risks to corporate bonds edged ahead.
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Investment Grade -
General Electric (GE) – Bonds issued by the industrial conglomerate were active across a variety of maturities on Friday as investors swapped equity for debt. Nevertheless the strong advance in government notes carried all the hallmarks of a massive flight to quality leaving interpretation of the performance of General Electric’s Aa2-rated paper open to interpretation. U.S. 10-year yields did indeed put in a new lifetime low at 1.899% after news that ECB economist Juergen Stark had resigned, rumored to be in disagreement with the central bank’s government bond buying program, which is merely acting as a Band-Aid on a gunshot wound. Most active on Friday were GE’s January 2021 bonds offering a mid-yield-to-maturity of 4.15%, where volume rose to $45mm. Buyers of about half that amount also pushed down the yield on GE’s January 2039 issue to 5.58% and at a 220bp spread to the long bond. Its November 2015 paper was also reasonably well traded with $25mm exchanged between investors yielding around 2.15%.
Toyota Motor (TM) – If President Obama can suggest a stimulus package of $447 billion for the U.S., then Toyota’s President can afford to throw $337million at building a second Indonesian plant. Word leaked of the company’s initiative to expand its Daihatsu brand in the emerging markets by doubling capacity in Indonesia as part of its aim to increase sales by half through 2015. Bulls were out sniffing at Toyota and although its shares were lower, we noted in our IB Options Brief earlier that option traders were looking for a rebound. Bond buyers also swallowed $20mm of Toyota’s August 2013 issue forcing the yield down by four basis points to 0.74% and outpacing a move in two-year government securities. Toyota’s paper is Aa3 by Moody’s.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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