Fixed Income Recap

Treasurys rallied today on a selloff in equities and some encouraging long-end buying by the Federal Reserve. The two-year finished up 11/64 on the day, and the ten-year was higher by 1&3/64. The benchmark curve flattened 3.5 basis points on the day, and currently sits at +226.5 bps. A basis point represents .01%.

With no new supply coming this week, Fed purchases stand to bring the market a little closer to equilibrium during the next few days. Treasury prices have been beaten down badly over the past two weeks – mostly due to investors stepping out and taking risk in other asset classes (corporate debt, stocks). However, if more money continues to flow out of the Treasury market, the Fed’s quantitative easing campaign won’t be nearly enough to absorb the rest of this year’s supply.

Fed purchased $3.51 billion in maturities ranging from 8/15/26 to 2/15/39. Cumulative purchases stand at $95.73 billion.

Credit
Microsoft sold corporate bonds today for the first time in the company’s history. The market for corporate bonds has followed stocks higher the past 2 months, while credit spreads tightened in, but Microsoft is a different animal. Microsoft’s $3.75 billion in five-, ten- and thirty-year bonds are expected to price at 95 to 105 basis points over Treasuries, or about 2.97%, 4.22% and 5.23% respectively. Microsoft currently has no debt outside of a $2 billion bank loan that comes due this year, and has a AAA rating. The rates Microsoft will pay on these bonds are just 40-50 bps more than Fannie Mae and Freddie Mac, who benefit from an explicit guarantee from the US Government.

According to data compiled by Bloomberg, $498.9 billion of investment grade debt has been issued so far this year, 25% more than the previous record for the same period set in 2007. Low absolute yields certainly make this market attractive to issuers. Investment grade spreads still remain pretty wide, but issuing debt at these interest costs can prove to be very advantageous for the long term. Especially for a company like Microsoft, who with this bond offer, will greatly diversify their capital structure. Whether they choose spend the cash to expand their business or to buy back stock at cheap level, this is a positive for Microsoft.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst