Fixed Income Weekly Review & Preview

Transcription

1 Fixed Income Weekly Review & Preview March 22, 2004 Fixed Income Research Joseph W. Jasper, CFA Director, Fixed Income Strategy & Marketing Private Client Research After seesaw trading, Treasuries ended nearly unchanged for the week. Outside of any significant economic or geopolitical surprise, there is nothing to suggest rates will move significantly in either direction this week. HIGHLIGHTS Treasuries Yields ended the week nearly where they began, rallying on Fed inaction then selling off as terror fears subsided. Mortgages Mortgages continue to cheapen on a LIBOR OAS basis, although we expect this trend to continue amid increased supply. We continue to favor the down in coupon trade and prefer 30-year 5s vs. higher coupons. Agencies Agencies mildly outperformed Treasuries last week. We continue to recommend intermediate callables with short lock-outs. Bullets may do well over the very near term given the high probability of GSE buybacks over the next week or two. Corporates While spreads in general continue to trade near their recent tights, sectors such as autos and media/telecom have experienced a decent spread widening. We continue to like the economically sensitive credits, including the auto related, energy, utility, media, and telecom sectors. Municipals Municipals cheapened vs. Treasuries last week as yields rose two to four basis points. We believe munis will continue to cheapen relative to Treasuries through May, as investors turn their attention to paying taxes. Note: The next Fixed Income Weekly will be published on Monday, April 12. Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst Certification, found on the back pages of this report or at the following site: Fixed Income Weekly Review Page 1 of 9 Piper Jaffray

2 YIELD, COMMODITY PRICE, CURRENCY, AND STOCK MARKET CHANGES FOR THE WEEK LAST WEEK PRIOR WEEK CHANGE (BP) 3 Month 0.94% 0.95% (1) 2 Year 1.52% 1.52% 0 5 Year 2.74% 2.73% 1 10 Year 3.78% 3.77% 1 30 Year 4.72% 4.72% 0 Curve 2s-30s CRB Crude Oil Gold Yen (4.15) Euro Wilshire ,853 10,968 (115) Dow Jones Ind. Avg. 10,187 10,240 (53) NASDAQ Comp. 1,940 1,985 (45) Source: Bloomberg ECONOMIC HIGHLIGHTS There were a number of meaningful economic releases last week, perhaps the most were the February CPI and January PPI. While the core CPI rose 0.2% in February, for the second straight month, the upside was driven by rising core goods prices. Prior to January, core goods prices had declined for 18 straight months. Given the surge in commodities prices over the past year, a partial pass through to consumers was not unexpected. Meanwhile, persistently high energy prices appear to be the culprit behind the recent faltering in consumer confidence. As we have stated on a number of occasions, rising oil and gasoline prices act as a significant tax on consumers. Further, analysts estimate that if retail gasoline prices were to remain at current elevated levels, the additional expense would wipeout nearly $40 billion in refunds and other savings from the Bush Tax Reform Act. Two points are worth noting. Our current excess capacity situation continues to prevent a meaningful pass through of rising raw materials prices. Offsetting this, the increased cost pressures do not appear to be affecting consumer spending or industrial production. The Fed s Redbook proclaims consumer spending intact and above plan. Meanwhile, industrial production recorded its second above consensus increase, rising 0.7% in February. The capacity utilization rate also rose 0.6% to 75.2%, a nearly 3-year high, but still well below the long-term average near 80%. Looking ahead, the markets will be watching Wednesday s durable goods report for signs that January s strong results can be maintained. Thursday s jobless claims data will also be interesting, given the surprise drop in initial claims last week to a three year low. In addition to the data, a number of Fed officials will be speaking during the week. Traders will be dissecting these public comments for any intelligence on monetary strategy. Other releases this week include personal income and spending, final Q4 GDP, and final Michigan consumer confidence. Fixed Income Weekly Review Page 2 of 9 Piper Jaffray

3 LAST WEEK S ECONOMIC RELEASES DAY STATISTIC ACTUAL CONSENSUS ESTIMATE Mon. Empire Manufacturing Industrial Production 0.7% 0.4% Capacity Utilization 76.6% 76.4% Tues. Housing Starts 1,855,000 1,950,000 FOMC Rate Decision 1% 1% Weds. Consumer Price Index 0.3% 0.3% Less: Food & Energy 0.2% 0.1% Thurs. Initial Jobless Claims 336, ,000 Continuing Claims 3,054, Leading Indicators 0.0% 0.1% Philadelphia Fed Index Source: Bloomberg THIS WEEK S ECONOMIC RELEASES DAY TIME STATISTIC CONSENSUS PREVIOUS (CDT) ESTIMATE Weds. 7:30 Durable Goods 1.5% -1.8% Less: Transportation 1.0% 2.0% Thurs. 7:30 Q4 Final GDP 4.1% 4.1% Personal Consumption 2.7% 2.7% GDP Price Deflator 1.2% 1.2% Initial Jobless Claims 340, ,000 Continuing Claims -- 3,054,000 9:00 New Home Sales 1,100,000 1,105,000 Fri. 7:30 Personal Income 0.3% 0.2% Personal Spending 0.5% 0.4% 8:50 Univ. of Mich. Confidence Source: Bloomberg FIXED INCOME STRATEGY Macro Themes As we expected, the FOMC left rates unchanged last week. Also as expected, there was no change in the language contained in the official statement over January s version. We continue to believe that absent a steady trend of significant monthly job growth and a dramatic ramp up in core inflation, Fed policy will remain intact for the balance of the year. In reviewing the January FOMC minutes, it is interesting to note that the motivation behind the Fed s decision to substitute patience for considerable period in reference to a change in rates was largely driven by a desire to correct expectations and sooth overall market volatility. The minutes state, a number of members commented that expectations of sustained policy accommodation appeared to have contributed to valuations in financial markets that left little room for downside risks, and the change in wording might prompt those markets to adjust more appropriately to changing economic circumstances in the future. The Fed, in being more forthright [misnomer?] about setting expectations, is still learning about what works and what doesn t in this process. Fixed Income Weekly Review Page 3 of 9 Piper Jaffray

4 GRAPH 1 HISTORICAL TREASURY SLOPE Source: Bloomberg, Piper Jaffray Off-the-runs On-the-runs Swap Yields STRIPS Treasuries Treasury prices traded in a fairly wide range last week, but ended essentially unchanged. Yields gapped lower on the heels of the Fed s decision to leave rates unchanged, and its policy statement nearly identical to January s version. As the week wore on, however, yields reversed course amid heavy corporate issuance, a reversal of flight to safety flows and stronger than expected CPI and PPI reports. On the week, the three-year, five-year, and ten-year yields ended up one basis point each at 1.92%, 2.74%, and 3.78%, while the two-year and long bond were unchanged at 1.52% and 4.72% respectively. This Monday, the Treasury will announce the size of its two-year note issuance for auction on Wednesday. We expect the note auction will be $26 billion in size, which has been the same since October. Agencies Agency spreads ended the week around basis points tighter vs. Treasuries. We continue to like owning intermediate, short lock-out callables, although bullets in the five to ten-year range could also perform well in the near-term given the likelihood for GSE buyback activity. We expect to see any repurchases occur by next Wednesday, the end of Q1. Conspiracy theorists were surely disappointed to read Fannie Mae s 10-K last week which put to bed rumors of significant derivatives trading losses. Derivative losses amounted to $6.9 billion, although this was more than offset by rising mortgage portfolio valuations. Fixed Income Weekly Review Page 4 of 9 Piper Jaffray

5 On the regulatory front, the Senate Banking committee meets on March 30 th to take action on the proposed GSE bill. The proposal includes the forming of a five-person regulatory board comprised of officials from several regulatory bodies, including the Treasury and HUD. The proposed regulatory body would likely be charged with setting mission goals, capital requirements, and structural objectives. We continue to believe that any reform designed to draw the GSEs closer to government oversight is a positive for bondholders. Mortgages Spreads widened across the coupon stack last week as mortgages cheapened on a LIBOR OAS basis but mixed vs. Treasuries. Fears of significant new supply in current coupons drove higher coupons to outperform. We continue to like 30-year 5s vs. higher coupons, including 5.5s. On a LIBOR OAS basis, valuations are at the cheapest levels this year. Still we expect valuations to cheapen as low absolute rates deter investors and ramped up production continues to hit the market. Refi Index / Mortgage Applications The Mortgage Bankers Association s index of mortgage applications rose 1.2% to The purchase index climbed 1.4% to The refinancing index rose 1.0% to Corporates A few of our longtime favorite sectors have been under spread widening pressure for several weeks. Auto sector credits have been perhaps the most beat up, widening an average of 60 basis points from their tights. We have seen a number of credits in the telecommunications and media space widen as well. Given the overall tightness of spreads in general, we believe the recent widening represents an attractive opportunity for investors looking to add to corporates. We continue to suggest focusing attention on the more economically sensitive sectors, such as auto related, energy, utilities, telecom, and media. Municipals Municipals cheapened vs. Treasuries last week with yields rising between two and four basis points across the curve, and continuing a yearly pattern of cheapening between February and May (see Graph 2). By early May last year, yields as a percent of Treasuries stretched into the mid-90% range for 10-year AAA paper and north of 100% for 30-year AAA bonds. While issuance is down from last year s elevated levels, we do expect yield ratios to continue to cheapen until after federal tax payments are made in mid-april. Fixed Income Weekly Review Page 5 of 9 Piper Jaffray

6 GRAPH 2 MMA CONSENSUS AAA YIELDS AS A % OF TREASURIES 100% 95% 94% 94% 93% 92% 90% 85% 80% 75% 88% 87% 85% 85% 81% 80% 76% 76% 87% 87% 85% 84% 70% 65% 60% 55% 50% 1-Yr 5-Yr 10-Yr 30-Yr Source: MMA-Research 3-Month Ago 1-Month Ago 1-Week Ago Current MUNICIPAL CONSENSUS YIELD CHANGES FOR THE WEEK MUNICIPAL CHANGE % TO TREASURY YIELD (BP) LAST WEEK PREVIOUS WK 5-YEAR AVG. 2 Year % 81.6% 77.1% 5 Year % 79.9% 80.4% 10 Year % 86.7% 85.4% 30 Year % 93.2% 94.3% Source: Municipal Market Advisors CORPORATE MARKET DETAIL CORPORATE RATINGS CHANGES Issuer Ratings Action Rating To From Moody s / S&P America West Airlines, Inc. Caa2 Caa3 Caa2/CCC Avista Corp. Outlook Stable Outlook Negative Baa3/BBB- Bombardier Inc. Outlook Negative Outlook Stable Baa3/BBB- CarrAmerica Realty Corp. Outlook Stable Outlook Negative Baa2/BBB Credit Lyonnais/Agricole Indosuez Aa2 Aa3 Aa2 Delta Air Lines, Inc. B- B+ B2/B- DPL Inc. & Dayton Power & Light Co. Ba2/*- Ba1 Ba2/BB- North Fork Bancorp Stable *- A3/BBB Pacific Gas & Electric Co. Baa3 Ba2 Baa3/CCC Pioneer Natural Resources Co. BBB- BB+ Ba1/BBB- Pride International *- Stable Ba2/BB Reynolds & Reynolds Co. Baa2 Baa1 Baa2/BBB Staples, Inc. Outlook Stable Outlook Negative Baa2/BBB- Fixed Income Weekly Review Page 6 of 9 Piper Jaffray

7 Issuer Ratings Action Rating To From Moody s / S&P The Toro Co. Outlook Negative Outlook Stable Baa3/BBB- Trico Marine Services Inc. Caa3 Caa2 Caa3/CCC- Xcel Energy Inc. Outlook Stable *+ Baa3/BBB- *: CreditWatch Developing *-: Review for Downgrade/CreditWatch Negative *+: Review for Upgrade/CreditWatch Positive SELECTED NEW ISSUES FROM LAST WEEK Issuer Coupon Maturity Spread (bp) Amt. Rating (MM) Moody s S&P INTL LEASE FINANCE CORP 3.5 4/1/ A1 AA- STANDARD COMMERCIAL CORP 8 4/15/ Ba3 BB+ SKANDINAVISKA ENSKILDA NA NA 500 A2 BBB+ KVAERNER A.S /15/2011 NA 260 B2 BB SUN SAGE BV /26/ Ba2 B+ ISPAT INLAND ULC NA 4/1/ Caa1 B- ISPAT INLAND ULC /1/ Caa1 B- FISHER SCIENTIFIC INTL /1/2024 NA 330 B2 /*+ B+ /*+ BEAR STEARNS CO INC /25/ A1 A CARRAMERICA REALTY CORP /1/ Baa2 BBB JETBLUE AIRWAYS CORP NA 12/15/2013 NA Aaa AAA JETBLUE AIRWAYS CORP NA 3/15/2014 NA Aaa AAA JETBLUE AIRWAYS CORP NA 3/15/2008 NA 124 Ba1 BB+ CITADEL BROADCASTING CO /15/2011 NA 330 NA NA PACIFIC GAS & ELECTRIC /1/ Baa2 BBB PACIFIC GAS & ELECTRIC 4.8 3/1/ Baa2 BBB PACIFIC GAS & ELECTRIC 4.2 3/1/ Baa2 BBB PACIFIC GAS & ELECTRIC 3.6 3/1/ Baa2 BBB PG&E CORP /3/2006 NA 1600 Baa2 BBB PROVIDIAN FINANCIAL CORP /15/2016 NA B2 NA ALEUTIAN INVESTMENTS LLC NA 4/9/2010 NA 195 Aaa AAA WESTLB COVERED BOND BANK 4 3/25/ Aaa AAA CYTYC CORP /15/2024 NA 250 NA NA GREATER BAY BANCORP 0 3/23/2024 NA Baa3 BBB- COUNTRYWIDE HOME LOAN 4 3/22/ A3 A ENTERGY LOUISIANA INC 5.5 4/1/ Baa2 BBB+ WELLS FARGO & CO /1/ Aa1 AA- WELLS FARGO & CO NA 3/23/2007 NA 4500 Aa1 AA- AMERICAN ACHIEVEMENT CRP /1/ B3 B- WASHINGTON MUTUAL INC /1/ Baa1 BBB SUNTRUST BANK NA 3/24/2006 NA 1000 Aa2 AA- SUNTRUST BANK NA 4/2/2008 NA 500 Aa2 AA- SIERRA PACIFIC RESOURCES /15/ B2 B- LIBERTY MUTUAL GROUP 7 3/15/ Baa3 NA LIBERTY MUTUAL GROUP /15/ Baa3 BBB CAPITALSOURCE INC /15/2034 NA 225 NA NA Fixed Income Weekly Review Page 7 of 9 Piper Jaffray

8 Issuer Coupon Maturity Spread (bp) Amt. Rating (MM) Moody s S&P MELLON FUNDING CORP /1/ A1 A+ NEXTEL COMMUNICATIONS /15/ B2 B+ POTOMAC ELECTRIC POWER C /15/ A3 A- POTOMAC ELECTRIC POWER C /15/ A3 A- INTL PAPER CO /1/ Baa2 BBB INTL PAPER CO 4 4/1/ Baa2 BBB HSBC BANK USA /1/ A1 A+ OMEGA HLTHCARE INVESTORS 7 4/1/ B2 /*+ BB- COOPER CAMERON CORP /15/ Baa1 A- RURAL CELLULAR CORP NA 3/15/2010 NA 160 B2 B- RURAL CELLULAR CORP /15/ B2 B- Source: Bloomberg New Preferred Issues Issuer Coupon Maturity Spread Ratings (bp) Moody s S&P PUBLIC STORAGE NA 4 Baa2 BBB+ CAPITAL AUTOMOTIVE REIT /15/ NA NA XL CAPITAL LTD 6.5 5/15/ A2 A APARTMENT INVT & MGMT CO 7.75 NA 7 Ba3 B+ RENAISSANCERE HLDGS LTD 6.08 NA 10 Baa2 BBB+ RAIT INVESTMENT TRUST 7.75 NA 2.4 NA NA Fixed Income Weekly Review Page 8 of 9 Piper Jaffray

9 Analyst Certification Joseph W. Jasper, CFA The views expressed in this report, including the Key Points and Risk sections in particular, accurately reflect my personal views about the subject Company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Research Disclosures The following disclosures apply to stocks mentioned in this report if and as indicated: (#) Piper Jaffray was making a market in the Company s securities at the time this research report was published. Piper Jaffray will buy and sell the Company s securities on a principal basis. (^) A Piper Jaffray analyst who follows this Company or a member of the analyst s household has a financial interest (a long equity position) in the Company s securities. (@) Within the past 12 months, Piper Jaffray was a managing underwriter of an offering of, or dealer manager of a tender offer for, the Company s securities or the securities of an affiliate. (>) Piper Jaffray has either received compensation for investment banking services from the Company within the past 12 months or expects to receive or intends to seek compensation within the next three months for investment banking services. (~) A Piper Jaffray analyst who follows this Company, a member of the analyst s household, a Piper Jaffray officer, director, or other Piper Jaffray employee is a director and/or officer of the Company. (+) Piper Jaffray and its affiliates, in aggregate, beneficially own 1% or more of a class of common equity securities of the subject Company. Disclaimer Piper Jaffray research analysts receive compensation that is, in part, based on revenues of Piper Jaffray Equities & Investment Banking which include overall investment banking revenues. Piper Jaffray research analysts who follow this Company report to the Head of Investment Research who, in turn, reports directly to the Chief Executive Officer of Piper Jaffray. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. Officers or employees of affiliates of Piper Jaffray & Co., or members of their families, may have a beneficial interest in the Company's securities and may purchase or sell such positions in the open market or otherwise. Notice to customers in the United Kingdom: This report is a communication made in the United Kingdom by Piper Jaffray & Co. to market counterparties or intermediate customers and is exclusively directed at such persons; it is not directed at private customers and any investment or services to which the communication may relate will not be available to private customers. In the United Kingdom, no persons other than a market counterparty or an intermediate customer should read or rely on any of the information in this communication. Securities products and services offered through Piper Jaffray & Co., member SIPC and NYSE, Inc., a subsidiary of Piper Jaffray Companies. Additional information is available upon request. No part of this report may be reproduced, copied, redistributed or posted without the prior consent of Piper Jaffray & Co Piper Jaffray & Co., 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota Fixed Income Weekly Review Page 9 of 9 Piper Jaffray