Retailer Bonds Pull Away as Time Warner Sells: Credit Markets

July 8 (Bloomberg) -- Retailers, buoyed by sales growing at the fastest pace in four years, are outperforming the U.S. corporate bond market as investors wager the economy will avoid a double-dip recession.

The bonds have returned 2.8 percent since the end of May as the market gained 1.9 percent, according to Bank of America Merrill Lynch index data. Greensboro, North Carolina-based apparel maker VF Corp., the index’s best performer in June, returned 5 percent for the month.

Retail sales probably expanded at an average monthly rate of 4 percent in the five months through the end of June, the biggest gain since 2006, the International Council of Shopping Centers said before a report due today. Discount retailers such as Wal-Mart Stores Inc. are attractive to investors because consumers are likely to switch to cheaper products if the economy slows, said Payden & Rygel’s Greg Tornga.

“People were out and about, spending money,” said Tornga, head of investment-grade strategy at the Los Angeles-based firm, which has more than $50 billion in assets under management. “They weren’t necessarily spending a lot of money, but it was an improvement over last year.”

Retailer debt returns exceeded the average for U.S. corporate bonds in each of the past three months, Bank of America Merrill Lynch index data show. Retailers returned 3.25 percent in June, compared with 1.89 percent for the market. Bonds from Bentonville, Arkansas-based Wal-Mart, the world’s biggest retailer, returned 3.61 percent last month. Target Corp. of Minneapolis, the second-biggest U.S. discount retailer, gained 4.2 percent.

Time Warner Offering

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt was unchanged at 196 basis points, or 1.96 percentage point, Bank of America Merrill Lynch’s Global Broad Market Corporate index shows. Yields averaged 3.957 percent.

Time Warner Inc., the New York-based owner of the Warner Bros. movie studio and the HBO cable channel, raised $3 billion in a three-part bond offering, its biggest since November 2006.

The company’s $1 billion of 6.1 percent, 30-year bonds yield 215 basis points more than similar maturity Treasuries, compared with the spread of 162 basis points it paid on $600 million of 6.2 percent 2040 bonds issued in March, according to data compiled by Bloomberg.

Bondholder Protection

The cost of protecting corporate debt from default in the U.S. fell for the fourth straight day.

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 5.7 basis points to a mid-price of 116 basis points, according to Markit Group Ltd.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 1.18 to 123, Markit prices show. The Markit iTraxx Asia index of swaps on 50 investment- grade borrowers outside Japan dropped 9.5 to 130.5 as of 8:20 a.m. in Hong Kong, according to Credit Agricole CIB.

The indexes typically fall as investor confidence improves and rise as it deteriorates. 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 contract protecting $10 million of debt.

Bank of America Merrill Lynch cut its forecast for U.S. investment-grade debt sales in 2010 to $700 billion from $800 billion, citing growth in company cash balances.

“Many issuers in high grade have flexibility to stay on the sidelines because balance sheets have become increasingly liquid over the past couple of years both for banks and industrials,” Bank of America analysts Hans Mikkelsen and Yuriy Shchuchinov wrote in a report.

Morgan Stanley

Morgan Stanley, owner of the world’s largest brokerage, was the most actively traded U.S. corporate bond yesterday by primary dealers followed by General Electric Co., Bloomberg data show. The most actively traded junk bond was Anadarko Petroleum Corp. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

Fannie Mae plans to sell three-year benchmark notes today, the Washington-based mortgage-finance company with U.S. government support said in a statement.

Citigroup Inc., Deutsche Bank AG and UBS AG are managing the transaction, Fannie Mae said. Investors should buy the 3- year notes and sell existing 2-year agency debt after the spread between the maturities “steepened slightly,” according to Jim Vogel, head of agency-debt research for FTN Financial in Memphis, Tennessee.

Retail Sales

The extra yield investors demand to hold emerging-market bonds rather than government notes declined the most in almost a month. The spread tightened 11 basis points to 323 basis points, the most it has narrowed since June 10, according to JPMorgan Chase & Co.’s Emerging Market Bond index.

Retail sales in June probably came in at the high end of a projected 3 percent to 4 percent range, the ICSC trade group said.

“Consumer spending picked up in the first half, and that by itself is very attractive for bond investors,” Lloyd McAdams, chief investment officer at Santa Monica, California- based Pacific Income Advisers, with $4.5 billion of assets under management.

The extra yield investors demand to own retailers’ bonds widened 2 basis points since the end of May to 118, as the overall market expanded 9 basis points to 315, according to Bank of America Merrill Lynch index data.

S&P has upgraded 10 investment-grade consumer non-cyclical borrowers this year and cut 8 issuers, compared with 2 increases and 12 downgrades in the same period last year, Bloomberg data show.

Wal-Mart, Target

Wal-Mart sold $3 billion of debt in a three-part offering on June 30 in its biggest dollar-denominated bond transaction since July 2001, Bloomberg data show.

Wal-Mart, which operates in 15 countries, has benefited from growth in Mexico, Canada and China, as sales declined at U.S. stores amid the worst recession since the 1930s. The company affirmed an earnings forecast on June 4 for second- quarter U.S. same-store sales ranging from a decline of 2 percent to an increase of 1 percent. Comparable-store sales have fallen for four straight quarters.

Target’s $1 billion of 5.375 percent notes due in 2017 have risen 5.77 cents to 114.16 cents on the dollar this year, the highest on record, according to Trace, the bond-price reporting system of Financial Industry Regulatory Authority.

Bigger Grocery Sections

Expanding grocery sections and adding smaller-format stores are priorities at Target, Chief Executive Officer Gregg Steinhafel said during a conference call on May 19. Same-store sales rose 2.8 percent in the first quarter, Target said May 19 in a statement.

VF reported net income of $163.5 million in its fiscal quarter ended April 3, compared with $100.9 million a year earlier, the maker of Lee and Wrangler jeans said in a May 12 regulatory filing.

“These names are higher quality, defensive in nature, naturally outperforming in times of risk reduction and defensive positioning,” said Nicholas Finkelman, who helps oversee $3.5 billion of bonds as a money manager at New York-based Ryan Labs Inc. “Valuations are a bit rich in these names on a relative basis, but they still have defensive qualities that may prove to be of significant value, if it’s going to be a bumpy ride.”