Outlook 2013: Fiscal cliff talks drive high-grade secondary market; trading projections mixed

By Aleesia Forni

Columbus, Ohio, Dec. 31 - Projections for the investment-grade secondary bond market are mixed for 2013, as sources cite several uncertain factors facing the market.

Following recent years that have seen historically low interest rates and issuers stepping up to price new deals, 2012 saw robust issuance in the primary market.

Some sources opined that the fiscal cliff may be the reason behind the large number of issuances late in 2012.

The year began with heightened investor optimism, though the debt crisis in Europe weighed on the minds of investor as the year moved on.

Still, one market source commented that 2012 "really was a great year" for the investment-grade market.

The Markit CDX Series 17 North American investment-grade index tightened to a spread of 90 basis points by late December from a spread of 118 bps at the start of 2012.

Impending 'bond burst'

"I just don't think it's realistic to think this [positive tone] is going to continue," one trader said of the market during 2012. "Things are going to turn around at some point."

However, timing on the so-called bond "bubble burst" is not certain.

"Nobody's got a definite idea of when that's going to happen," one market source said, adding that the year "could be 2013."

When posed with this forecast, another market source stated that he believes the fall of the long-standing bull market "won't be as soon as that."

Another trader agreed that the end of the positive tone in the high-grade market may not be so near, as investors continue to pour in.

"The demand is still there," he said.

This demand, along with the Fed's plans to keep long-term interest rates low until the unemployment rate has dropped below 6.5%, has the trader feeling optimistic about the upcoming year.

"We could certainly see an improved year [in 2013]."

Cliff a 'significant factor'

In recent months, the upcoming fiscal-cliff discussions have taken center stage, as talks between the two sides have investors feeling more optimistic about a resolution.

"Things have been looking better recently," one trader said of the negotiations. "Hopefully we see some more progress."

Whether the Republicans and Democrats will be able to reach a mutual agreement will be an important issue in predicting secondary performance in the year ahead.

"That's going to be a significant factor going forward," the trader added.

Bank paper stands out

Bank and financial names were a standout sector in 2012's trading, one market source said.

"We're seeing tightening across the board as we head into the end of the year," the source said of spreads in bank paper.

Bank of America Corp.'s 7.625% notes due 2019 came in to 127 bps from 400 bps earlier in the year, a bond source said.

In another deal from that issuer, the bank's 6.5% notes due 2016 were quoted at 125 bps bid compared to 391 bps in February.

Citigroup Inc.'s 8.5% notes due 2019 also tightened to 107 bps from 319 bps seen at the start of 2012.

Goldman Sachs' 5.75% notes, which were sold at a spread of 380 bps over Treasuries on Jan. 19, 2012, were quoted at 155 bps bid in December.

HP bonds in focus

Also in the secondary market, Hewlett-Packard Co.'s bonds were watched closely by traders during the last months of 2012.

In November, HP reported earnings that included an $8.8 billion accounting write-down due to an acquisition gone wrong during the year.

A number of the company's bonds were trading actively in the sessions following the news, with most spreads trading 20 bps to 40 bps wider.

However, the bonds saw a rally following Moody's Investors Service's downgrade of the company to Baa1 from A3 later that month.

The Palo Alto, Calif., computer, printing and imaging company's 4.05% notes due 2022 were trading at 320 bps bid, 310 bps offered in December.

The notes were sold at a spread of 210 bps over Treasuries in March.

S&P: 'continued volatility'

Standard & Poor's investment-grade composite tightened by 1 bp to 186 bps in December.

The rating agency expects "continued volatility in the near term."

"On the positive side, we expect U.S. corporate defaults to remain below the long-term average in the short term," according to a report released by the agency.

"On the negative side, an increase in volatility in the financial markets, influenced by weakening economic conditions, could continue to weigh on risky assets."

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