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Apr 25, 2019

Markets | Fed Shift Shakes Up World of Speculative Debt

The Wall Street Journal.
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Markets
Good morning. Amrith Ramkumar here breaking down the latest market moves.
Stock futures are slipping, after the Dow inched slightly further away from last year's record Wednesday. The S&P and Nasdaq edged down from their Tuesday all-time highs. 
Facebook and Microsoft are climbing premarket after yesterday afternoon's results, while Tesla shares are sliding. We're also weighing just-released figures from a host of companies including Comcast and UPS. Amazon.com, Intel and Starbucks lead the group reporting after the market closes.
Before we see if the Dow can make a run at a new record, our Sam Goldfarb examines the rally in speculative-grade bonds. 
 

Markets in a Minute

Markets Data
 

Overnight Developments

  • Stocks in Europe and several Asian markets slipped on Thursday following a weaker close for U.S. markets and poor economic data from South Korea, one of Asia’s biggest exporters.
  • Read our full market wrap here
 

Speculative-Grade Bonds Surge After Fed Shift

By Sam Goldfarb, bond market reporter
A sharp rally in speculative-grade corporate bonds has pushed their average yield below that of comparably-rated loans, an unusual market distortion reflecting an improved economic outlook and the Federal Reserve’s retreat from tightening monetary policy.
Bond yields, which move in the opposite direction of prices, typically exceed those of loans because holders of the latter are typically paid first in bankruptcies. This year, yields on both are down amid a broad rally in riskier assets.
Still, yields on bonds are down more in large part because the floating coupons of loans have become less appealing now that the Fed is no longer raising interest rates.
At the same time, investors see little reason to seek shelter in loans given a still-benign economic environment and low rate of corporate defaults. 
As of April 23, the average yield to maturity of bonds in the Bloomberg Barclays high yield index was 6.51%, down from 8.0% at the end of last year, while the average yield of loans in the S&P/LSTA Leveraged Loan index was 6.53%, down from 7.23%.
Loan yields have exceeded bond yields since March 26, the first prolonged stretch where that has been the case since 2007. That year, the Fed also halted rate-increases after a long period of tightening monetary policy.
Some consider the extra yield that investors are demanding to hold loans over bonds to be surprising.
Despite a recent uptick in issuance of secured bonds that would be ranked equal to loans in a bankruptcy proceeding, most bonds are unsecured, meaning their holders are at greater risk of losses if the companies that have issued them encounter financial stress.
That is why average loan yields have been lower than average bond yields for the vast majority of time since a market for loans emerged in the 1990s.
What is happening now is “a technical dislocation” in the debt markets, said Frank Ossino, a senior portfolio manager and sector head of the bank loan asset class at Newfleet Asset Management.
Responding to the shifting outlook for interest rates, investors have pulled cash out of loan mutual funds and exchange-traded funds for 22 consecutive weeks, leading to a total net outflow of $25.6 billion, according to Lipper. Bond funds, meanwhile, have pulled in a net $3.4 billion over that stretch, including $7.2 billion over the past six weeks.

Market Facts

  • The PHLX Semiconductor Index climbed 1% Wednesday to a sixth consecutive record close after the latest earnings from Texas Instruments. Semiconductor stocks are now up 38% for the year.
     
  • Anadarko Petroleum shares rose 12% Wednesday, bringing their rally since Chevron offered to buy the company earlier this month for roughly $33 billion to 53%. The stock is at its highest level since July. Wednesday's rise came after Occidental Petroleum offered to buy Anadarko for about $38 billion, setting up a possible bidding war.
     
  • On this day in 1961, the first patent for an integrated circuit was awarded to Fairchild Semiconductor’s Robert Noyce, who later co-founded Intel with Gordon Moore. Today Intel has a market value of nearly $265 billion.

Key Events

U.S. durable-goods orders for March are expected to rise 0.5% from the prior month. The figures are slated for 8:30 a.m. ET.
U.S. jobless claims, also out at 8:30 a.m., are expected to rise to 201,000 from 192,000 a week earlier.
Natural-gas inventories will be released at 10:30 a.m. Stockpiles are expected to have risen 89 billion cubic feet last week, a much bigger addition than average for this time of year, per the average target of 13 analysts and traders surveyed by the Journal.
 

Must Reads

The wager would pay out if the ETF gave up some of its recent gains and fell more than 1% by June. It occurred during a period of strength in the U.S. dollar and weakness in the euro. PHOTO: PAUL YEUNG/BLOOMBERG NEWS
Trading surged on bearish options of a U.S. dollar ETF. A large wager took place on Wednesday which showed that the recent strength in the U.S. dollar could be short-lived. Even so, the U.S. dollar rose broadly amid signs of weakness in a number of economies around the world.
Deutsche Bank deal talks with Commerzbank have broken down. Banking giant Deutsche Bank and crosstown rival Commerzbank ended merger talks, leaving in tatters the German government’s hope to shore up both banks and create a banking powerhouse.
Messaging startup Slack is expected to file its listing prospectus this week. Slack Technologies is taking the next step toward going public, with plans to reveal its prospectus as soon as this week, according to people familiar with the matter.
Venmo’s user base outnumbers most big banks. More than 40 million individuals used Venmo in the past 12 months, making the digital-money transfer service among the most popular financial apps in the country, owner PayPal Holdings reported in its quarterly results.
Barclays’ investment bank is struggling ahead of a key board vote. Barclays Chief Executive Jes Staley dismissed the need for any strategic changes after first-quarter net profit in its corporate and investment bank fell 28%.
A big warehouse owner plans to go public. Industrial-warehouse manager GLP is planning to take its U.S. arm public this year, in what would be one of the biggest real-estate listings on record.
 

What We've Heard on the Street

“Unless U.S. growth falters, oil prices look well supported. But counting on China to push them much higher might be a mistake.”
—Heard on the Street columnist Nathaniel Taplin
 

Stocks to Watch

Microsoft: The software firm posted a 14% increase in year-over-year quarterly sales, a larger rise than Wall Street had anticipated.
Facebook: The social-media company said monthly active users grew slightly more than analysts expected in the latest quarter from a year earlier.
Tesla: The electric auto maker posted a quarterly loss that was wider than anticipated.
Visa: The credit-card company reported quarterly revenue roughly in line with analyst targets.
Chipotle: The burrito chain reported stronger-than-expected same-store sales in its latest period.
PayPal: The mobile payments company gave slightly softer-than-projected revenue targets for the current period.

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