Primary remains quiet as investors prepare for a tough year; secondary flat in thin trading

By Sheri Kasprzak

New York, Dec. 23 - The new-issue market remained quiet ahead of the Christmas break. Some in the market are now turning to 2011's investment prospects, and some insiders say investors might be moving away from the investment-grade market in search of yield.

Following comments made earlier in the week by Janney Montgomery Scott LLC's chief fixed income strategist Guy LeBas, one sellside source responded Thursday that it seems reasonable that investors might turn to a triple-B-rated bond to take advantage of yield.

"Interest rates are dropping, and I think he [LeBas] is on to something," said the sellsider.

"I think it's going to be a difficult year [for investment grade], but you really have to be smart about where you put your money. That's always true. Pick your investments carefully, and you can do really well."

LeBas reported earlier in the week that inflows to high-yield bond funds and outflows from corporate bond funds suggest that investors are chasing yield all the way to the high-yield market.

"Last week, the mutual fund companies reported a record $2.5 billion in outflows from ... corporate bond funds in general, though a further breakdown from EPFR [Global] shows that number includes $222 million of inflows into high-yield bond funds," said LeBas.

"With interest rates still trending around long-term lows, the retail investor community in particular is reaching for yield within the credit markets. This yield-chasing trend emerged in the early summer and will likely persist into 2011, which offer a strong basis for high-yield outperformance in the coming year."

'Dead as expected today'

Secondary trading was flat on Thursday, sources said.

"Dead as expected today," one trader said. "Not enough flow to really tell, but it looks like spreads did nothing."

Financial bonds were flat to slightly weaker, a trader said.

Bank of America Corp.'s bonds were unchanged to 2 basis points wider, while Goldman Sachs Group, Inc.'s notes were "unchanged to 3 wider."

The Markit CDX Series 14 North American investment-grade index eased 1 bp to a spread of 86 bps on Thursday, according to Markit Group Ltd.

Little activity is expected in the upcoming week as the year closes out.

"Next week is going to be pretty much zero," a source said.

Overall investment-grade Trace volume was seen at an extremely low level of $1.5 billion early in the day, a source said.

"Corporates for the most part practically shut down for the last two-week period of the year," another source said. "Dealers get their balance sheets in place and don't want to add any more inventory. It's tough to get bids on bonds."

Treasuries fall

Treasuries fell on the short trading day on stronger economic data and the positioning of portfolios for year-end business.

The yield on the 10-year note rose to 3.38% from 3.34%. The 30-year bond yield added 2 bps to 4.46%.

"We've got a lot of supply next week in an environment where it's probably going to be extremely illiquid," said Mary Ann Hurley, a fixed income trader for D.A. Davidson & Co.

"Not only are people out, but people are having their books closed for the year, so I think Treasuries could struggle," she said.

The Treasury Department plans to auction a total of $99 billion of two-, five- and seven-year notes on Monday, Tuesday and Wednesday.

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