Safety Trumps Yield in Bill Sales

Investors Scoop Up 0% Short-Term Notes

MICHAEL S. DERBY and LIZ RAPPAPORT / Wall Street Journal 10dec2008

Investors gave the U.S. government 0% financing and the yield on other Treasury bills fell below 0% on Tuesday, but when energy company El Paso Corp. held out its hand, it had to pay 15.25%.

The Treasury sold four-week notes at a 0% yield for the first time, with investors in effect giving their cash to the government for safe-keeping until 2009. This rush to safety occurred last year, too, when investors wanted only to own the very safest, most liquid investments when they closed their books at the end of the year.

Even as investors were lending $30 billion to the government, whose balance sheet is deteriorating, at the 0% rate, they made El Paso pay the onerous 15.25% to borrow $500 million for five years.

The yields are not perfectly comparable because El Paso is borrowing for a far longer period than the government, though five-year Treasurys rallied Tuesday, with their yield conversely falling to 1.60%, just above the lowest yield in decades. [Treasury Yield]

The same nervous investors snapped up three-month Treasury bills, pushing their prices up and yield down below zero for a brief period.

Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, one of the 17 primary dealers of U.S. government debt, said some investors bought three-month Treasury bills from his firm with negative yields of 0.01% to 0.02% Tuesday. By the end of active trade, the yield had inched back up to positive 0.02%.

In round numbers, the investors were willing to pay $100, knowing they would get $99.99 in return, in the belief that a small but guaranteed loss was preferable to investing in stocks, corporate bonds or other securities. Treasurys have been flirting with 0% yields since the Lehman Brothers bankruptcy nearly three months ago.

"The bond market is doing a much better job than stocks right now of telling you about the risks that are out there," said Thomas H. Attenberry, a partner at First Pacific Advisors, an investment-management firm in Los Angeles. The high yield investors are demanding on anything other than Treasurys is particularly worrisome because companies need to refinance more than $800 billion worth of debt next year, according to analyst estimates.

With the markets for many companies nearly closed or prohibitively expensive, regulators and investors are concerned about the wave of troubles and defaults this might cause if the logjam persists. More than $200 billion is coming due in the current quarter and most of that has not been refinanced.

"The government has to do more," says John Lonski, chief economist at Moody's Investors Service. He wants the government to provide fiscal stimulus, stabilize the 30-year mortgage rate, and ensure the markets have enough liquidity to sustain any positive momentum.

El Paso bonds are rated as junk, but on the higher end of the scale, meaning its balance sheet is stronger than other junk-rated companies. The sale of bonds by the El Paso, which has nearly $1 billion in debt coming due in the first half of next year, was the first junk-bond deal in six weeks.

El Paso, based in Houston, both drills for natural gas and operates 42,000 miles of pipelines transporting the fuel. Similar to other companies in the natural gas business, amid falling prices for the fuel and tighter financing, El Paso is scaling back plans to invest in natural gas fields and pipelines next year.

Speaking last month at the company's third-quarter results announcement, Mark Leland, chief financial officer, said that while the company didn't plan on selling bonds before the second half of 2009, it would be "opportunistic."

While high yields are onerous for companies, others won't be able to borrow at all. "Some U.S. issuers are looking at coupons that are more expensive, but that they can live with," says Mark Bamford, who heads up the global bond syndicate at Barclays Capital. "For others [with lower credit ratings], the question is access, not price."

Highly rated companies have been able to borrow recently. On Monday, companies including General Dynamics and Royal Dutch Shell sold $5 billion in bonds, while banks, which are issuing debt backed by the government, have sold more than $50 billion in debt over the past two weeks.

But for some companies that have debt due this quarter, the day of reckoning is just around the corner. Commercial real-estate developers and investors are going to face a crunch when nearly $20 billion of their debt comes due in 2009, according to Deutsche Bank Securities.

That represents about 3% of the $800 billion market for commercial mortgage-backed securities, or CMBS. With the frozen debt market, commercial and investment banks have all but stopped lending to these borrowers, leaving them to turn to regional banks, which typically have tighter lending terms than investment banks, and have recently shown signs of scaling back.

—Lingling Wei and Min Zeng contributed to this article.

source: 10dec2008