Investment-grade financials lead stronger market amid light volume; primary on vacation

By Cristal Cody and Sheri Kasprzak

New York, Dec. 22 - Secondary high-grade trading stayed light but with a strong tone in the financial sector on Tuesday as traders headed out with just 1½ sessions left in the short holiday week.

As one trader said, it's "thin holiday conditions out there - half-staffed desks, thin liquidity."

In secondary trading, a market source said the widely followed CDX Series 13 North American high-grade index tightened 2 basis points to a mid bid-asked spread level of 84 bps on Tuesday.

"Things were definitely on the quiet side today," one trader said.

Declining issues for a second day stayed ahead of advancing issues, a source said.

Overall market activity, as reflected in dollar volumes, rose more than 25% from the levels seen on Monday.

In the interim, selling continued for a second day in U.S. Treasuries as investors moved to stocks. The benchmark 10-year Treasury note eased to 3.75% from 3.67% on Monday.

Meanwhile, secondary activity in the high-grade financial sector stayed strong, a source said.

There was a "pretty strong tone to the market. Even though it's a pretty thin Street out there, paper's probably 3 to 5 bps tighter today in the bank and finance sector."

But, secondary trading was not heavy for JPMorgan Chase & Co.'s $4 billion in extindibles a day after the surprise deal was sold at par to yield Libor flat, one trader said.

Meanwhile, a source said other issuers, including CVS Caremark Corp. and Alcoa, Inc. finished tighter for the day.

Issuance faded on the primary side of the market following a large deal the previous day from JPMorgan Chase & Co.

Companies will likely wait until after the holidays to do any further deals, as many simply don't need to issue bonds until then.

Syndicates busy despite deal drought

New deals are likely on vacation until after the holidays, syndicate sources said, although desks have stayed busy wrapping up work for the end of the year.

"We are surprisingly busy today," a source said early in the afternoon. "It's good because there aren't any deals to worry about."

Issuance has been light the last couple of weeks, and the only sale so far this week was a somewhat surprising $4 billion offering by JPMorgan Chase.

"Everyone's pretty much already out," the source said.

Another source commented on the change in spreads from the beginning of the year to Tuesday. Corporate spreads began the year at about 600 bps, and were in the high-190s at the end of the day. A trader said that short-term Morgan Stanley bonds were trading at a yield of 50% in the previous year, while they were at a 1% yield on Tuesday.

Year-end cleanup tightens finance sector

Looking at JPMorgan's extendibles in the secondary, a trader said he had "not seen anything" a day after the financial services company priced $4 billion in notes initially due in 13 months and extendible to 2015 at par to yield Libor flat.

"It's pretty quiet out there."

According to one market source, JPMorgan's 2.125% bonds due 2012 did see some activity. The bonds tightened to 23 bps over from 33 bps over a day earlier.

Meanwhile, secondary trading was active in other financial names, including Morgan Stanley & Co. Inc.'s $2 billion in 4.2% senior bonds due 2014 that it priced in the primary market in November, according to a source.

The 5.05% two-year bonds from the New York-based financial services company widened 10 bps to 65 bps on Tuesday.

Meanwhile, Morgan Stanley's 7.25% bonds due 2032 tightened to 137 bps over from 150 bps over a day earlier, according to a source.

In other financial sector activity, a source quoted that Citigroup Inc.'s 6.37% five-year bonds tightening to 258 bps over Treasuries on Tuesday from 275 bps plus a day earlier.

The New York financial services company's 8.125% bonds due 2039 also tightened by 10 bps to 242 bps plus on Tuesday, according to a source.

Activity in Morgan Stanley's and Citigroup's bonds is attributable to "year-end cleanup," one trader said. "That's some people flattening out their books."

Alcoa mostly unchanged on Saudi venture

Meanwhile, a few traders are looking at bonds from Alcoa after Moody's Investors Service said Monday it may drop the aluminum manufacturer's ratings to junk from its current Baa3 rating.

Alcoa's plans to form a joint venture with Saudi Arabian Mining Co. to build an industrial aluminum complex.

Moody's said the Saudi joint venture would force Pittsburgh-based Alcoa to commit nearly $1 billion to the project during an earnings slowdown.

A trader said Alcoa's bonds due 2037 were bid around 85 bps to 87 bps plus on Tuesday versus a bid of 86 bps to 87.5 bps plus in the week before - so "it's not rockin' a whole lot," mostly because "a lot of people have already closed their books for the year."

'Decent flow' in CVS notes

In other secondary trading on Tuesday, a market source said CVS' 5.75% bonds due 2017 tightened to 119 bps over Treasuries from 151 bps in trading the day before.

Woonsocket, R.I.-based CVS said Monday it hired the president of genetic benefits manager Generation Health to lead its Caremark pharmacy benefits business starting Jan. 4.

One trader said CVS' notes narrowed 10 basis points.

"Today, they were offered at 105 bps and yesterday they were offered at 120 bps. On Friday, they were offered at 110 bps. It's seeing decent flow."

Altria's 9.7% bonds tighten

In other trading, the 9.7% bonds due 2018 from Altria Group Inc. tightened by 10 bps on Tuesday, according to one market source.

The Richmond, Va.-based tobacco manufacturer's bonds were quoted at 233 bps over Treasuries.

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