By Steven Levine

NEW YORK, Oct 11 (MNI) – While a small handful of issuers announced new
investment-grade corporate bond sales Thursday, the positive mood in the U.S.
credit market turned more pronounced after a steep drop in initial claims data.

The pace of high grade corporate, supranational and sovereign bond
offerings eased from the recent swell of issuance, following Tuesday’s start to
earnings season. In the background, however, a high note reverberated in the
domestic credit market from the latest release of the U.S. jobless claims
report.

By midday, the North American index for investment-grade credits, or IG.19,
reached an intraday tight of around 96.00 basis point from a wide of 98.00 bps
in early morning activity. This is also an improvement of about 3.25 bps from
the index’s intraday wide on Wednesday.

Market participants generally shrugged off Standard & Poor’s downgrade of
Spain after initial claims for U.S. state unemployment benefits declined by
30,000 to 339,000 in the October 6 week, the lowest level seen since February
2008. The data also fell well-below the 365,000 figure estimated by economists
surveyed by MNI.

A Labor Department analyst said that seasonal factors expected a decline of
18.3% in unadjusted claims in the October 6 week, but unadjusted claims fell
just 8.6% to 327,063. A large chunk of the decline though were due to one state
delaying start-of-quarter paperwork.

Nomura’s senior economist Ellen Zentner noted that while “unadjusted
initial jobless claims in the first week of a new quarter tend to be extremely
volatile, which makes seasonal adjustment especially difficult,” that “seasonal
adjustment factor likely over-adjusted the raw data, resulting in the outsized
drop in claims.”

Zentner expects next week’s initial claims report to rise.

In the interim, the better news overshadowed risk-aversion earlier in the
day after S&P downgraded Spain’s sovereign credit rating late Wednesday by two
notches to ‘BBB-‘, one rung above junk status, with a negative outlook. As of
Wednesday, S&P and Moody’s Investors Service rate Spain on the lowest tier of
their investment-grade credit ratings ladders.

Gavan Nolan, director of credit research at Markit, noted that while market
watchers await Moody’s decision, expected by the end of October, whether the
agency will cut Spain’s rating into its junk status category, that the two-day
EU summit scheduled on October 18 to 19 will be “of crucial importance.”

Nolan cited that “the policy on direct bank recapitalizations will probably
be a catalyst for market direction” and added that there also remains the
uncertainty over Spain’s request for a bailout.

Market watchers also pointed out that the lift in risk-taking sentiment
Thursday was aided by a decent Italian government bond auction.

By midday, investment-grade corporate bond spreads were mainly tighter on
the day in the intraday New York trading session. Total estimated volume was
last over $7.5 billion, according to MarketAxess data. The 10-year U.S. Treasury
note hit an intraday low yield of 1.673% after reaching an intraday high yield
of 1.731%, according to one broker screen.

Among the most traded investment-grade corporate bonds:

Telecom Italia Capital’s 7.200% notes due July 2036 were last 11 bps
tighter on the day at a spread of 422 bps more than U.S. Treasuries of similar
maturities;

Amgen’s 5.150% bonds due November 2041 were last 6 bps better at a spread
of 150 bps more than matched-maturity U.S. government debt; and General Electric
Co’s 2.700% 10-year notes were last tighter by 5 bps at a spread of 87 bps more
than comparable U.S. Treasuries.

On the high grade bond supply front, although a short-list of
investment-grade corporate bond offerings landed Thursday on the calendar, a
recent swell of corporate, supranational and sovereign supply culminated in a
month-to-date tally of $33.25 billion.

Among the deals listed Thursday, domestic hospital service provider Dignity
Health was set to sell $500 million of single-‘A’ rated notes in 10-year and
30-year maturities. Citigroup and J.P. Morgan were the joint lead managers on
the deal.

Also, Nippon Life Insurance Company priced $2 billion of 30-year bonds at a
price to yield 5.0% via joint leads Citigroup and J.P. Morgan. The deal was
rated ‘Aa3′ by Moody’s and ‘A+’ by S&P.

The sale was said to be about 10 times oversubscribed at the time of
pricing as bond investors general hunger for yield continued to be voracious.

Mischler Financial’s head fixed income syndicate Ron Quigley observed that
thus far this week, average oversubscription rates ranged from more than four
times to nearly 6 times as “borrowers continue to lock in the lowest rates while
pricing into frenzied investor demand.”

He said he could not recall “ever having seen so many consecutive days or
weeks” of negative concessions “yet despite that, most of these deals are
trending tighter in secondary markets.”

Although market sources widely expected that high grade corporate debt
issuance would dwindle as earnings season kicks into high gear, Quigley added
that “it is a prime time for overseas issuers to tap the U.S. credit markets.”

Analysts observed that cash spreads have tightened profoundly following
various monetary policy actions taken recently by several major global central
banks, including the Federal Reserve’s latest round of quantitative easing
measures.

Analysts at Morgan Stanley noted cash spreads have “tightened considerably
during the past few months as the Fed’s asset purchase program coupled with a
low growth, low inflation world have enhanced the bid for credit,” Morgan
Stanley cited.

Since May, cash spreads improved by around 68 bps to 142 bps as of
Wednesday, according to Morgan Stanley’s research data.

“Despite a decidedly mixed macro-economic backdrop, demand for credit
remains robust,” they said, and as a result, “September was a record month for
issuance as IG companies are taking advantage of near all-time low yields for
longer dated debt.”

A total of more than $142 billion of high grade corporate, supranational
and sovereign debt supply priced in September compared to just $68.7 billion in
the same year-ago period based on MNI’s US$ Credit Supply Pipeline.

Morgan Stanley noted they “still favor Non-Financial BBBs,” and other
analysts have also observed a general rise in demand for riskier credit-quality
assets.

Bank of America/Merrill Lynch global credit strategist Hans Mikkelsen noted
in a recent Situation Room report that following the rally since early June,
high grade industrials rated ‘A’ or higher have become “significantly
overvalued” versus ‘BBBs.’

“With now much tighter spreads investors are being forced out the quality
curve,” Mikkelsen said and recommended triple-‘B’ rated non-financials compared
to ‘A’-rated or higher-rated counterparts, “even on a risk adjusted basis.” He
also cited that “there is little value in higher rated industrials given
elevated releveraging risk in the segment, as well as little spread cushion to
offset interest rate risk.”

Looking ahead, several overseas issuers could issue new U.S.
dollar-denominated debt at the conclusions of their respective investor meeting
presentations, including a triple-‘A’ rated deal from North American Development
Bank, and ‘BBB’-rated sales each from Anadolu Efes and Thailand’s PTT PCL.

For additional supply offerings, see the full listing of deals on
the US$ Credit Supply Pipeline, an abbreviated list of which is appended below.

10/11 US$ CREDIT SUPPLY PIPELINE – October 11, 2012

WTD: 8,400
MTD: 33,250 MTD 2011: 7,150 YTD: 985,780

Investment-grade $250M+
Deals Announced/Launched(#)/Priced(*)/Pass(X)

Date $MM Issuer/CR/Descr Mat Yield Lead(s)
10/10 2000 *Nippon Life Insurance Co (Aa3 30 5.0% C/JPM
Subordinated Notes, 30nc10y
10/10 TBD Dignity Health (A3/A) 10 C/JPM
Talk T+150-160 area
10/10 TBD Dignity Health (A3/A) 30 C/JPM
Talk T+175-185 area
Size=$500M, split TBD
10/10 700 *QIIB Sukuk Funding Ltd (A-/A3 5 2.688% HSBC/QNB/SCB
Qatar International Islamic Bank
Dollar Sukuk
10/10 RDS PTT PCL (Baa1/BBB+) BAR/C/DB/
Possible 144A Reg S deal? (Thailand) JPM
Road show expected to start 10/12
10/10 RDS Anadolu Efes (Baa3/BBB-) BAML/HSBC/
Possible US$ bond, near future? JPM/RBS
10/10 RDS North American Development Bank BAML/BNP
(Aaa/AA+) Talk road show to end 10/18

** MNI New York Bureau: 212-669-6430 **

–email: slevine@mni-news.com

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