Stocks plummeted, and issuance of investment-grade corporate bonds was virtually nonexistent Monday, as worries about the financial woes of European governments resurfaced.

Treasurys, which are viewed as an ultra-safe investment, benefited from the renewed fears. Meanwhile, municipal-bond prices, which typically follow the trading direction of U.S. government bonds, were unchanged, as the market continued to take a breather from a more-than-month-long rally.
--------------Investment-grade corporate bonds
Issuance ground to a halt in the high-grade-corporate market Monday on the back of renewed concerns about European sovereign debt.
Supply was expected to be robust and front-loaded this week in anticipation of the May 30 Memorial Day holiday. But the shift in sentiment served as a caution for those readying debt deals, and apparently none were willing to be first out of the gate.
To be sure, a major rush of corporate-bond issuance mirroring last week hasn’t happened. Most borrowers are in a “go/no-go” decision-making process despite cheap access to the market. “It’s a balancing act between wanting to take advantage of the rally in rates versus a little weakness
[in sentiment] and the potential lack of focus given the holiday-shortened week,” according to one money manager.
A whopping $34.4 billion in U.S. high-grade issues were sold last week making it the third busiest on record by volume, according to data provider Dealogic.
In the secondary cash market, trading was moderate with more losers than gainers.
The top-10 most actively traded bonds all lost ground and were wider by an average of three basis points, according to MarketAxess. Goldman Sachs (GS) 6.00% notes due 2020 were last quoted six basis points wider to 195 basis points over Treasurys, and were the most actively traded high-grade bond this session according to MarketAxess.
Meanwhile, the CDX.NA.IG16 high-grade derivatives index was also markedly weaker this session, and last quoted off by 2.2%, or wider by two basis points, to 91.5 basis points, according to Markit. The index is linked to 125 companies and used to speculate on creditworthiness or hedge against losses. An increase in the index signals a dip in investor confidence.
Still, market participants agree that a weaker market tone won’t permanently overshadow still extremely attractive borrowing conditions for those seeking financing via the U.S. debt market.
“Earnings season is essentially over, and May is starting to feel like issuance season as corporate borrowers take advantage of the extraordinarily low yields,” according to a Barclays Capital research note.
-----------High-yield corporate bonds
Several issuers of high-yield debt tapped the market Monday, displaying little concern for European financial woes.
Industry participants say with low interest rates and the chance to push out debt maturities, this trend is likely to continue. Last week, $11.5 billion of speculative-grade bonds was priced, breaking the previous weekly record of $11.3 billion in September 2010, according to data provider Dealogic.
Issuance will likely slow down later in the week as market participants get distracted by the Memorial Day holiday.
Portfolio managers “will have one foot out the door on Friday” as the bond market is scheduled to close early ahead of Memorial Day, said Adrian Miller, senior vice president of Miller Tabak Roberts Securities LLC in New York. “So we can expect a smaller calendar this week compared to last, though possibly not by much.”
Oil States International Inc. (OIS) had a $600 million in eight-year senior notes on Monday. Other high-yield deals in the market include OGX Petroleo e Gas Participacoes SA (OGXP3.BR, OGXPY). with a $2 billion seven-year bond, General Motors Financial Inc.’s $500 million senior unsecured notes and Regency Energy with a $500 million bond.
WCA Waste Corp. (WCAA) is also tapping the high-yield market with a $175 million eight-year bond as conditions for new issuance remain conducive.
------------Asset-backed securities
The North Carolina State Education Assistance Authority is tapping the asset-backed bond market with a $516 million bond.
It is backed by student loans and will be sold in three tranches.
Joint lead managers are Royal Bank of Canada and Bank of America Merrill Lynch.
Pricing is expected later this week.
--------------Municipal bonds
Prices of top-rated municipal bonds were unchanged, even as the Treasury market rallied Monday.
The trading direction of munis typically follows that of U.S. government bonds. But muni-bond prices are taking a breather from a more-than-month-long rally, fueled by ultra-light new bond sale supply and a cautious bias is still in the market, some market participants said.
“The music has stopped for the time being,” said Thomson Reuters Municipal Market Data senior analyst Randy Smolik.
Dan Solender, director of municipal-bond management at investment firm Lord Abbett, noted the recent negative undertone to the market had more to do with “investors adjusting to the lower yields rather than anything fundamental with municipals.”
Meanwhile, in the primary market, Massachusetts held a second day of retail orders for $490 million in general-obligation bonds. Compared with Friday’s scale, prices were lowered and yields were raised as much as three basis points on many maturities in offering, but that had to do more with the overall market tone versus anything specifically related to the deal, a person familiar with the matter said.
Massachusetts is said to have sold around $100 million of the bonds to individual buyers Friday. According to a preliminary term sheet Monday, a $10 million tranche maturing in 2025 offered a 3.50% coupon and top yield of 3.66%. The offering expected to be sold to institutional investors Tuesday. J.P. Morgan leads a team of underwriters on the issue.
----------------Treasurys
Another round of credit downgrades exacerbated euro-zone-debt fears Monday, sending investors scurrying for the safety of Treasurys and pushing yields toward the lows of the year.
Investor confidence was shaken as Europe’s sovereign-credit woes came back into focus after Fitch slashed Greek debt three notches deeper into junk territory to B+ late Friday. Worries that Greece’s unmanageable debt burden might spread across the region deepened as Standard & Poor’s Friday slapped a negative outlook on Italy’s credit rating.
In late-afternoon trading, the benchmark 10-year note gained 6/32 in price to yield 3.130%. Analysts are watching for a break below the 200-day moving average of 3.09%.
The 30-year bond was up 17/32 to yield 4.267%, while the two-year note was flat to yield 0.523%. Bond prices and yields move inversely.
(Source: Dow Jones)