Tuesday, February 16, 2010

Companies are Pulling Bond Sales

From Bloomberg:

Companies are pulling bond sales at the fastest pace since the credit markets seized up 2 1/2 years ago on concern that the inability of European governments to trim their budget deficits will threaten a global recovery.

At least 16 borrowers including Montreal-based airplane maker Bombardier Inc. and Italian betting company Snai SpA have postponed or withdrawn $7.3 billion of debt sales over the past month, according to data compiled by Bloomberg. That’s the most since more than 50 were canceled in the months after financial markets began to freeze in July 2007.

The extra yield investors demand to hold high-risk company bonds rather than the safest government debt has jumped almost 1 percentage point since Jan. 11, the biggest increase since March, according to Bank of America Merrill Lynch’s Global High- Yield Index. European finance ministers are meeting in Brussels amid mounting pressure to explain what steps they’ll take to help Greece reduce its swelling fiscal shortfall.

“Investors are concerned about Greece and the broader economy much more than they were a couple of months back,” said Jonathan Moore, an analyst at Evolution Securities Ltd. in London. “They understandably want to charge more, and most companies aren’t willing to pay that price.”

The reason companies are pulling sales from the market is simple: they don't want to pay higher interest rates for bonds they sell. In addition, there is concern that the Greek situation will bleed into the economy at large causing a slowdown -- that is, that the Greek situation will be the precipitating event of another recession. No one wants to go into debt before a recession.

Let's take a look at some charts from the corporate market to see how severe the damage is.

A.) Prices rebounded after the massive sell-off caused by the financial crisis.

B.) Prices have consolidated in their upward trajectory.

Note there has been an increase in volume over the last few months. However -- so far -- prices are holding right at technical support

I should add, considering JNKs massive rally last year, a sell-off that lasts a few months could also be seen as a healthy dose of profit taking. That being said, the Fibonacci levels for a sell-off are in this chart:

The LQDs - the investment grade corporate bond ETF -- has the same pattern and the JNKs:

A.) Prices rebounded from extremely oversold levels and

B.) Are currently consolidating.

However -- unlike the JNKs -- there isn't a mass exodus in the form of volume leaving the security. In other words, the sell-off is occurring in the higher yielding/higher risk areas of the market.