April 2014 – Monthly Commentary
Investors pushed bond prices marginally higher in April with the yield-to-maturity of the 10-year Treasury falling 6 basis points, and the 2-year Treasury essentially unchanged for the month.
Any suspicion that the economic slowdown witnessed earlier this year was anything more than weather-related was dispelled with the release of the employment report for April. Recall that investors were surprised last month when the March employment report showed a gain of 192,000 workers. Worried that the sizable increase in workers didn’t jibe with the anecdotal slowdown in economic activity, many expected that the report would be revised lower. In fact, the opposite occurred. The Bureau of Labor Statistics reported that 288,000 jobs were created in the April and the March report was revised by 11,000 to 203,000. That marks the third consecutive month that the U.S. economy has generated more that 200,000 new jobs. That news comes on the back of better than expected corporate earnings. At the time of this writing, both revenue and earnings for the first quarter are exceeding estimates, shaking off the weather-related drag. The equity market has struggled to rally, though, as corporate management has guided expectations for future growth lower. With that warning, investors are left to grapple with whether record profit margins are sustainable and pent-up demand from the winter will translate into greater revenue for the remainder of the year, or have margins peaked and corporations may begin to see rates of profitability slow. Complicating the matter is the anecdotal slowdown that has been evident in the housing sector. While housing demand was quite likely impacted by the bad weather, it’s nonetheless, being watched as an indicator of economic health. Also weighing on the minds of investors is Russia’s uninvited intrusion in the Ukraine and the implications former Soviet Union members.
In an interesting turn of irony, Apple announced an $11 billion multi-tranche corporate deal on April 30th, 364 days after they brought their last mega-deal to the market. The deal issued last year totaled $17 billion, which represented the largest corporate bond deal to date at the time. Like last year’s deal, the new Apple bonds were spread among maturities ranging from 3-year notes to 30-year bonds. To recap, the 30-year tranche issued last year was initially priced at a spread of 100 basis points more than the Treasury note of the same maturity. That deal traded above par for exactly four days and hasn’t closed above since issuance. Spread widening and rising interest rates pushed the dollar price of the issue to a low price of $81 last fall before recovering to the low $90’s recently. In marketing the new issue, dealers suggested the spread would be as wide as 120 basis points more than the yield on 30-year Treasury bonds. But with demand strong, the spread was narrowed by 20 basis points to the identical 100 basis points at which the 2013 issue was priced. The change in that spread represented approximately a 3% premium for the buyers of the new debt. Portfolio managers that bought the issue should hope that history doesn’t repeat itself because the 2013 vintage closed its first month of trading down 9% on heavy volume.