Have you heard much about Actavis before today?
Me neither, but that sure changed quickly! Actavis is a big pharmaceutical company that announced it would buy Allergan back in Nov for around $66 bln. As is sometimes the case with these big buyouts, the buying firm needs to raise cash for the deal. Actavis did this in a big way today--much bigger than the street was expecting. It actually ended up being the 2nd biggest corporate bond deal ever. To put it in perspective, the last corporate deals that made waves were Apple and Microsoft (those tiny little companies...) at $6.5 and $10.75 bln respectively.
While the Actavis deal didn't come close to the epic Verizon bond offering ($47 bln), it crushed the runners up as it was last reported to be in the neighborhood of $27 bln.
That's a lot of debt hitting the market at the same time, and a lot of investors wanted it. There were roughly 3 dollars of bidding interest on the books for every dollar available. So yeah... that saps some demand from other sectors of the bond market in and of itself. On top of that, keep in mind that corporate debt is frequently hedged via instruments that effectively sell Treasuries. Treasury yields form the basis for most corporate bond pricing, so selling Treasuries is just another way of locking the rate (the same way a new mortgage lock implies MBS selling).
The double whammy above (competing supply and rate-lock selling) accounts for the lion's share of today's weakness, but there was also an asset allocation trade in the works. That's a fancy way of saying traders were selling bonds to buy stocks. It became painfully obvious that these factors were driving the market right after the 10am ISM data. The data was poor, but bonds sold aggressively.
The takeaway is that traders were chomping at the bit to sell bonds, but were waiting to make sure that ISM wouldn't set them up for a huge 'pain trade' (read: being on the wrong side of the market) as ISM is one of those few reports where a big enough miss can actually trump anything else in play. As you probably guessed, today's miss wasn't one of those...
MBS | FNMA 3.0 101-17 : -0-12 | FNMA 3.5 104-17 : -0-10 | FNMA 4.0 106-24 : -0-07 |
Treasuries | 2 YR 0.6620 : +0.0400 | 10 YR 2.0890 : +0.0925 | 30 YR 2.6860 : +0.0926 |
Pricing as of 3/2/15 5:34PMEST |