US retailer bonds fall behind as shoppers spend less

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BR WALMART Bloomberg Customers check out with Walmart employees at the registers inside the new Walmart Neighborhood Market grocery store after it's grand opening on Friday, September 28, 2012 in Panorama City, CA, U.S. The smaller neighborhood market store format is designed to provide convenient shopping for groceries, pharmacy items and general merchandise. Photographer: Patrick T. Fallon/Bloomberg

Victoria Stilwell

Bonds of US retailers from Target to Wal-Mart Stores are posting their worst losses since 2006 amid smaller consumer income and slowing growth in the US economy, even as the broader corporate debt market generates gains.

The Bank of America Merrill Lynch US non-food and drug retail index lost 0.5 percent in 2013 after reinvested interest, compared with a return of 0.84 percent for the firm’s measure of investment grade bonds from all industries.

The retailers’ securities tumbled 1.6 percent this month through Tuesday, heading for their biggest monthly loss since the height of the credit crisis in October 2008.

Shoppers are tightening their belts as disposable income falls the most since 2009 and they adjust to smaller pay stubs. After a 2 percentage point increase this year in the tax that funds Social Security, Americans who earn $50 000 (R477 000) annually are taking home about $83 less a month.

Walmart forecast second-quarter profit that fell short of analyst estimates, while Target reduced its earnings projection by about 15c a share for the year.

“Not everyone is re-employed yet, and even if they are, they’re still worried about keeping their job and their income stream,” Susan Hutman, a retail debt analyst and vice-president at AllianceBernstein in New York, said. “No management team has come out and sounded optimistic.”

The extra yield investors demand to own retailers’ bonds has declined 1 basis point to 108 basis points this year, while spreads on the broader US investment-grade market tightened 12 points to 142 basis points, Bank of America Merrill Lynch index data show.

“This sector has gotten to be very tight, and the results have not been as strong as of late,” Scott MacDonald, the head of research at MC Asset Management Holdings, said.

“If there’s some questions over the fundamentals in the industry, investors may say, ‘Spreads are pretty tight here. Let me rotate to another sector where things are going better’.”

Elsewhere in credit markets, a benchmark credit default swaps index in the US rose after Federal Reserve chairman Ben Bernanke told Congress on Wednesday that the central bank might cut the pace of bond purchases if economic conditions warranted. Lloyds Banking Group plans to auction about $8.7bn of US home-loan securities without government backing that were issued before the credit crisis. Financiere Agache, the majority owner of French luxury goods maker Christian Dior, is seeking to refinance a e500m (R6bn) loan.

The US two-year interest rate swap spread, a measure of debt market stress, rose 0.25 basis point to 14.75 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favour assets such as corporate bonds.

The Markit CDX North American investment grade index, which investors use to hedge against losses or to speculate on creditworthiness, increased 1.5 basis points to a mid-price of 71.6 basis points, according to prices. The benchmark had earlier fallen toward the lowest closing level since November 2007, after Bernanke said in prepared congressional remarks that reducing asset purchases too soon would endanger the economic recovery.

Investors are weighing the Fed comments for indications of when it might scale back stimulus measures.

The Markit iTraxx Europe index, tied to 125 companies with investment grade ratings, jumped 6 basis points to 93 at 12.50pm in London yesterday. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan rose 4.5 to 105.5.

The indices typically rise as investor confidence 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 contract protecting $10m of debt.

The Standard & Poor’s (S&P)/LSTA US leveraged loan 100 index rose 0.02 cent to 98.88c on the dollar, matching a five-year high reached on May 9. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 3.32 percent this year.

Leveraged loans and high-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

In emerging markets, relative yields decreased 10 basis points to 275 basis points, or 2.75 percentage points, according to JPMorgan Chase’s EMBI global index, which has averaged 281 this year.

With US gross domestic product growth expected to slow to 2 percent this year, according to a survey of analysts, consumers were still hesitant about spending, Scott Tuhy, a senior analyst at Moody’s, said. While US investment grade bonds overall had declined as well, losing 0.9 percent this month, retail’s dependence on the financial health of US households differentiated it from other sectors, he said.

Disposable income adjusted for inflation dropped at a 5.3 percent annualised rate from January to March, the biggest decline since the third quarter of 2009, after a 6.2 percent gain in the previous quarter.

“Retail is tied to the consumer, and the choppiness you’ve seen in some of the Commerce Department’s retail sales numbers, the issues around the payroll tax, those are clearly headwinds,” Tuhy said. “It’ll take some time to adapt to that.”

Profit for retailers in the S&P 500 index contracted 9.9 percent in the first quarter, analysts estimate, compared with 2.8 percent growth for the broader consumer discretionary industry.

The payroll tax increase and “some of the most unfavourable spring weather in recent years across much of the country” curbed first-quarter revenue at Walmart, chief executive William Simon said last week.

Walmart sold $5bn of debt on April 4, its biggest offering in two years. The chain store operator’s $1.75 billion of 2.55 percent 10-year notes had declined 2c from the issue price to 97.75c on the dollar on Wednesday, according to data on Trace, the reporting system of the Financial Industry Regulatory Authority.

Retail sales excluding vehicles and petrol stations rose 0.6 percent in April, Commerce Department data showed, exceeding analysts’ estimates of 0.3 percent growth. Still, that did not necessarily translate into immediately improved earnings, Jack Kleinhenz, the chief economist for the National Retail Federation, said.

Fiscal policy had become “significantly more restrictive”, and was expected to weigh on the economy this year, Bernanke said on Wednesday.

Adding to the industry’s challenges, retailer bonds’ “duration is a little longer than the broader market, and that tells you it’s more interest rate sensitive and explains a lot of the weakness,” Anthony Valeri, a market strategist with LPL Financial, said. – Bloomberg


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