CREDIT MARKETS: Buyers Return Ahead Of US Jobs Report

   By DOW JONES NEWSWIRES 
 

Credit markets continued to carry a positive tone Thursday and investors were eager to buy new bond issues. Hope for a solution to the European debt crisis and for the domestic economy to improve pushed investors into riskier assets including stocks and corporate debt.

Following some better-than-forecast U.S. data this week--including Thursday's weekly jobless claims report--Friday's jobs report will be key as market participants are anticipating an improvement.

"Some investors are positioned for an upside surprise from the jobs data," said Chris Ahrens, head of U.S. interest-rate strategy at UBS Securities LLC. in Stamford, Conn. "The economy is still chugging along with a 1.5% growth rate--low but not a recession."

    Investment-grade 

Four high-grade issuers came to market Thursday, following on from a week that had already included $3.8 billion in new investment-grade corporate borrowing, according to data provider Dealogic. Market conditions were encouraging, with the Markit CDX derivatives index--a measure of U.S. corporate bond risk--improving 3.4% day over day.

BG Energy Capital PLC, the funding arm of U.K. utility BG Group PLC (BG.LN BRGYY), led off with a sale of $3 billion of senior unsecured debt--its largest-ever debt sale, according to Dealogic, and the largest deal among high-grade issuers in the U.S. since Intel Corp.'s (INTC) $5 billion on Sept. 14.

Oil-and-gas-services company Origin Energy Ltd. (ORG.AU) was also in the market Thursday, with $500 million of 10-year debt launched at 3.50 percentage points over Treasurys; along with mining-machinery company Joy Global Inc. (JOYG), with a $500 million, 10-year deal to help fund its 41.1% acquisition of International Mining Machinery Holdings (ICMHF, 1683.HK); utility Public Service Co. of New Mexico with a $160 million, 10-year deal; and Southern California Edison Co. with a $150 million, three-year deal.

    Junk 

In the secondary market, junk issuers experienced surging prices on existing bonds on improved investor expectations for a resolution in Greece. Many buyers were eager to take advantage of low prices and high yields.

In Hexion U.S. Finance Corp. notes due Nov. 15, 2020, there was a rise in price to 73 cents on the dollar from 70.563 cents earlier in the day. The yield on the bond, which moves inversely to price, fell to 14.417% from 15.040%, according to MarketAxess data.

A gauge of investor sentiment, the Markit.CDX.NA.HY, rose one point to 88.3, according to Markit data.

In the primary market, there were no new issues, though that could change if the market condition continues.

   Mortgages 

Low-coupon mortgage-backed securities outpaced Treasurys as the Federal Reserve reported its first purchases under its new reinvestment program and investors swapped out of other MBS considered vulnerable to losses if the government takes measures to boost refinancing.

Demand was strongest for bonds paying 3.5% and 4% interest, where the Fed has been expected to concentrate its purchases aimed at supporting the ailing housing market. This afternoon, the Fed said it bought $3.95 billion in the bonds over the last two days.

The gains in current-coupon MBS narrowed their yield spread to benchmark 10-year Treasurys to 119 basis points Thursday from 121 basis points Wednesday and 125 basis points Tuesday, according to Locus, a Credit Suisse analytics platform.

Higher-interest MBS, such as those with 5% coupons, dropped more than Treasurys as a top U.S. housing regulator said his agency expects to finish work on an expanded mortgage-refinancing program by the end of the month. Such an effort likely would increase the speed at which loan principal is returned to investors, which causes a loss as the money is returned at face value despite the bonds' prices above $107.

   Munis 

Municipal bonds sputtered Thursday, as dealers and investors struggled to absorb the recent torrent of new issuance against a backdrop of weakening Treasurys.

Yields on top-rated muni bonds, which rose between five and 20 basis points Wednesday, were up anywhere from two to 12 basis points, with the greatest weakness seen again in the 10-year area, according to Thomson Reuters Municipal Market Data.

"There's a building sense that we backed off so quickly so fast that the revenue pipeline that had looked so awesome lately is shrinking," said Randy Smolik of MMD.

Yields on a $115 million competitive deal from the University System of Maryland came in higher than where comparable bonds were trading in the secondary market, similar to other new issues this week, indicating that underwriters are having to offer price concessions to investors to drum up interest.

The 30-day calendar of upcoming bond issues dropped to $7.8 billion from $12.5 billion Wednesday, according to Smolik.

   Treasurys 

Treasurys lost ground again, extending their losing streak to a third-straight session. The three-day losing streak put a dent in the nearly eight-month bull run of Treasurys, considered a safe haven when other markets are in turmoil. The benchmark 10-year yield, which moves inversely to its price, has risen by more than 30 basis points from its historic low set in late September.

With yields trading near rock-bottom levels, the market is prone to bouts of profit taking. But some traders said yields are unlikely to rise significantly and could even fall back again. They cited supportive factors such as buying from the Federal Reserve and uncertainty about an effective solution to the debt problems in Greece and several other euro-zone member nations.

In late afternoon trading, the benchmark 10-year note was 24/32 lower in price to yield 1.988%. The 30-year bond was 1 19/32 lower to yield 2.956%. Bond prices move inversely to their yields.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; [e-mail]

-Min Zeng, Al Yoon, Katy Burne and Michael Aneiro contributed to this article.