Bank of Nova Scotia sells covered bonds; Corporates trade weaker, Verizon flat, IBM firm

By Cristal Cody

Prospect News, Oct. 28 - The Bank of Nova Scotia tapped the U.S. market on Friday with the sale of $2 billion of three-year covered bonds, capping a busy week where issuers came with more than $15 billion of new deals.

"This week, high-grade bond funds had their first outflows since August, while high-yield funds had their largest inflows on records, $4.2 billion," a trader said.

Among the issuers over the week included Citigroup Inc. and Goldman Sachs Group Inc., and just on Thursday Verizon Communications Inc., BP Capital Markets plc, International Business Machines Corp., Morgan Stanley, U.S. Bancorp, SunTrust Banks, Inc. and CSX Corp. brought deals.

Bonds ended the day flat to weaker as the market digested the week's new issues.

The Markit CDX Series 17 North American high-grade index eased 1 basis point to a spread of 114 bps after coming in 13 bps the previous day.

"The story today is really a pullback in investor risk aversion after Thursday's strong advance," a bond source said. "As a result, we're seeing spreads widen. Most of the new issues are trading a little bit weaker, although on-the-run deals, including those new issuers, are holding up better than off-the-run issuers. That's reflective of the still uncertain liquidity risks in the market."

For example, Morgan Stanley's notes are wider, though the 5.5% notes due 2021 are trading better than Morgan Stanley's 5.5% senior notes due 2020, the source said.

"We're seeing spreads on the 21s hold in a lot better than the spreads on the 20s," the source said.

Bank CDS rise

Bank and brokerage credit default swaps costs rose on Friday, indicating less investor confidence in the financial sector, a trader said.

Bank CDS costs were seen 4 bps to 10 bps higher. Brokerage/investment bank CDS costs traded 10 bps higher across the board.

International Business Machines Corp.'s new notes were seen "holding in better than most issues," a trader said.

Verizon Communications Inc.'s new 10-year notes traded flat.

Most paper traded "a little bit weaker on the break just because of the high volume and strong demand," a source said. "Activity seems to have slowed down a great deal this afternoon."

Overall trading volume fell more than 25% to $10 billion on Friday.

Treasuries reversed some losses on the long end. The 10-year note yield dropped to 2.32% from 2.39%. The 30-year bond yield closed down at 3.37% from 3.45%.

Bank of Nova Scotia prices

Bank of Nova Scotia tapped the U.S. high-grade market on Friday with the sale of $2 billion of 1.25% three-year covered bonds (Aaa/AAA/AAA) at 99.985 to yield 1.255%, a market source said.

The notes due Nov. 7, 2014 priced at a spread of 77.4 bps over Treasuries.

Bank of America Merrill Lynch, Barclays Capital Inc., Morgan Stanley & Co. Inc., Scotia Capital Inc. and UBS Investment Bank were the lead managers.

The financial services company is based in Toronto.

Morgan Stanley wider

In the secondary market, Morgan Stanley's 5.5% notes due 2021 traded flat on Friday at 335 bps over Treasuries, while its 5.5% notes due 2020 traded about 20 bps wider on Friday, a source said.

Morgan Stanley reopened the 5.5% notes due 2021 (A2/A/A) to add $1 billion on Thursday priced at a spread of Treasuries plus 335 bps.

The 5.5% notes due 2021 were priced on July 21 with a 250 bps spread.

Morgan Stanley sold the 5.5% notes due 2020 on Dec. 22, 2010 at 270 bps over Treasuries.

The financial services company is based in New York City.

IBM holds in

IBM's 2.9% notes due 2021 traded on Friday at 61 bps bid, holding in while other new deals traded weaker, a source said.

IBM sold $500 million of the notes (Aa3/A+/A+) at a spread of Treasuries plus 62.5 bps.

The technology company is based in Armonk, N.Y.

Verizon unchanged

Verizon Communications' 3.5% paper due 2021 priced at 120 bps over Treasuries on Thursday traded unchanged on Friday, a trader said.

The company priced $1.75 billion of the notes as part of a $4.5 billion sale of senior notes (A3/A-/A) in four tranches on Thursday.

The broadband and telecommunications company is based in New York City.

Paul Deckelman contributed to this review

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