TRADE IDEA-Take profits in overbought corporate bonds-Merrill
NEW YORK, May 7 (Reuters) - Investors should take profits
in overbought corporate bonds, and in particular some
telecommunications bonds, because the recent rally is due for a
pause, Merrill Lynch & Co. said in a report dated Friday.
"Over the next couple of weeks, we expect what has been an
insatiable demand for credit product to slow for two reasons:
1) the calendar; and 2) an end of short covering," it said.
"The substantial and quick narrowing of spreads suggest at
least a pause, if not a slight correction, near term."
Between April 18, when a surprise Federal Reserve interest
rate cut triggered a corporate bond rally, and last Thursday,
the last day for which data are available, corporate bonds have
easily outperformed safer U.S. Treasuries.
Spreads, the yield difference between the bonds and
comparable maturity Treasuries, shrank to 1.59 percentage
points from 1.77 for investment-grade bonds, and to 7.57
percentage points from 8.13 for junk bonds.
Telecom has been a big source of the tightening, Merrill
Lynch said.
The sector, which was much out of favor earlier this year
because of heavy bond supply and elevated corporate debt
levels, has enjoyed 0.46 percentage point of spread tightening
since early April, when Merrill Lynch said it increased its
recommended allocation to the sector.
As a result, though, "some telecom names are beginning to
indicate overbought conditions, suggesting limited near-term
spread tightening," Merrill Lynch said.
The bank used technical analysis to assess bonds of 10
leading telecoms -- AT&T Corp. , British
Telecommunications Plc , Deutsche Telekom AG ,
France Telecom , Qwest Communications Inc. ,
Sprint Corp. , Telefonica SpA , Verizon
Communications Inc. , Vodafone AirTouch Plc , and
WorldCom Inc. .
It concluded that Deutsche Telekom and France Telecom bonds
are "at the most overbought levels ever." It urged investors to
swap out of those bonds and into bonds of British
Telecommunications and Sprint.
As of April 30, 10-year telecom bonds carried the following
spreads relative to Treasuries, with respective ratings as
indicated from Moody's Investors Service and Standard &
Poor's:
-- AT&T, 1.95 percentage points, A2/A;
-- British Telecommunications, 2.13 percentage points,
A2/A;
-- Deutsche Telekom, 2.36 percentage points, A2/A-minus;
-- France Telecom, 2.23 percentage points, A3/A-minus;
-- Qwest Communications, 1.82 percentage points,
Baa1/BBB-plus;
-- Sprint, 2.33 percentage points, Baa1/BBB-plus;
-- Telefonica, 1.98 percentage points, A2/A-plus;
-- Verizon Communications, 1.47 percentage points,
A1/A-plus;
-- Vodafone AirTouch, 1.43 percentage points, A2/A, and
-- WorldCom, 2.5 percentage points, A3/BBB-plus.
859-1662, jon.stempel@reuters.com ))
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Rtr 10:50 05-07-01 |
