Fall in bonds of retailers mirrors slowing sales

Sector’s record Thanksgiving weekend spurt fizzles out as stores report less-than-estimated revenue, driving notes down

lows gains for Spanish banks in December. With bans on short selling in place in parts of Europe, the US banks have been used as proxies for their European peers.

Such fears are now receding. Yet the earnings season is expected to be lacklustre, and the banks epitomise the uncertainty that hangs over the economy and the stock market. Trading on about 7.5 times expectations for this year’s earnings, they are reasonably cheap.

Funding costs have come down. Yet there is still little demand for credit. And, for the investment banks trading volumes continue to fall, So the future is nowhere near as bad as it seemed in the summer last year. But remember that better than feared is not yet a rosy longterm prognosis. There is still an awful lot of money paying for the safety of US government bonds.

— Financial Times New York (Bloomberg) Bond investors are driving down the price of debt issued by retailers as they report comparable-store sales for the holiday season that are failing to live up to a record Thanksgiving weekend.

The cost of protecting bonds of Gap Inc. from default approached a record last week and contracts on J.C. Penney Co. had the biggest two-day surge in 14 months. Merchandiser debentures have lost 0.4 per cent this month with Family Dollar Stores Inc. the only one of the top 50 borrowers in Bank of America Merrill Lynch’s US retailer index showing positive returns for January. Investment-grade corporate bonds overall are little changed.

San Francisco-based Gap, Target Corp. and Kohl’s Corp. reported December same-store sales that were below analysts’ estimates after mistiming promotions or running out of inventory. Weaker retailers will struggle to maintain market share as competition increases, according to Fitch Ratings.

“It’s a case of hangover,” said Anthony Valeri, market strategist at LPL Financial, which manages $330 billion (Dh1.2 trillion).

“After a strong start to shopping over Thanksgiving weekend, big discounts and weaker-than-forecast December sales have left investors a little queasy.”

Slow retail growth

While s ome re t ai l ers such as Macy’s Inc. had sales that beat estimates and boosted earnings forecasts, analysts say revenue for S&P 500 retailers grew 6.4 per cent last quarter, compared with 7. 2 per cent for the overall index excluding f inancial companies, according to data compiled by Bloomberg.

An i n i t i a l l y “b u l l i s h view” of the holiday sales season didn’t pan out, said Scott Tuhy, an analyst at Moody’s Investors Service. Retailers may have hurt their own profits by offering deals just to get consumers in the door, he said.

“The consumer wasn’t going to come out unless there was a deal, because they’ve been so trained by retailers to expect a deal.”

Fitch estimates that the 45 retailers it rates or monitors have $12 billion of debt coming due this year. Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debentures declined for a third week, reaching the lowest level since November. Prices on leveraged loans rose to the highest in seven weeks. In emerging markets, spreads tightened.

Relative yields on company bonds from the US to Europe and Asia contracted 10 basis points to 257 basis points, or 2.57 percentage points, the lowest since November 21, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Average yields fell to 3.949 per cent from 3.972 per cent on December 30.

GE most active

Bonds of General Electric Co. were the most actively traded US corporate securities by dealers last week, with 953 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. A $4 billion offering on January 4 from GE, the world’s largest manufacturer of j et engines, led $74 billion of bond sales worldwide last week, compared with $87.5 billion in the five days ended January 7, 2011, according to Bloomberg data.

GE’S $2 billion of 2. 1 5 per cent, three-year notes rose 0.5 cent from the issue price to 100.408 cents on the dollar as of January 6, Trace data show.

The cost of protecting corporate bonds from default in the US was little changed for the week after touching the lowest level since October.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on company debt or to speculate on creditworthiness, rose 0. 1 basis point to a mid- price of 120. 1 basis points, according to data provider CMA. The gauge touched 118.1 basis points on January 3, the lowest since October 28.

In London, the Markit i Traxx Europe Index of 125 companies with investment-grade ratings added 0.2 to 177.9, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Both indexes typically rise as investor conf i dence deteriorates and fall as it improves.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

Emerging markets

In the Asia- Pacif ic region, the Markit i Traxx Asia index of 40 investment-grade borrowers outside Japan rose two basis points to 208.5 basis points as of 8:34am in Hong Kong, Royal Bank of Scotland Group Plc prices show. The gauge is set for its highest close since December 21, according to CMA.

The Standard & Poor’s/ LSTA US Leveraged Loan 100 index rose for a third week, gaining 0.9 cent to 91.66 cents on the dollar, the highest since November 17. The measure, which tracks the 100 largest dollar-denominated f irst-lien leveraged loans, has returned 0.47 per cent in the past 12 months.

Leveraged l oans a nd high-yield bonds are graded below Baa3 by Moody’s I nve s t o r s S e r v i ce a n d lower than BBB- by S&P. In emerging markets, relative yields fell three basis points to 422 basis points, according to J Pmorgan Chase & Co.’s EMBI Global index. The index has averaged 343 in the past year. expect

a n d i n g l ong- standing from governments battling the global f inancial crisis could be in for disappointment. The only initiatives getting any attention have an extremely short- term perspective.

“Because of the low share of permanent consolidation measures in the US relative to other countries, f iscal policy will do little to alleviate global current account imbalances,” said John Driff i l l , professor of economics at the UK’S Birkbeck College.

“Fiscal policy will tighten further in 2012, mainly on account of tightening in the US, but also because of sizable consolidation in various euro area economies.”

Driff ill sees the world economy stumbling along through a mishmash of pacts and deals for monetary and financial policies. During the recent lecture at Abu Dhabi’s Emirates Centre for Strategic Studies and Research, he referred to the IMF report for 2011 which stresses that the Eurozone crisis would spill over into other economies.

“Worr y i n g l y, va r i o u s consumer and business confidence indicators in advanced economies have retreated sharply, rather than strengthened as might have been expected,” Driffill said.

Driffill is among economists who expect a shift from the dollar to another currency that is convertible. And that could well be the Chinese yuan.