Issuers wait for price discovery; high yields also deter; Morgan Stanley, Johnson & Johnson tighten

By Andrea Heisinger

New York, Oct. 14 - The investment-grade primary market spent Tuesday checking the tone, which was more upbeat than in past weeks, helped by the infusion of Treasury money into banks both large and small and other steps announced by the government to shore up the economy.

Sources said they had not ruled out new issues to start the week but were not surprised when none materialized.

In the secondary market, Morgan Stanley & Co. saw its bonds move higher after it completed the sale of a stake in the bank to Mitsubishi UFJ, and Johnson & Johnson Inc. bonds were slightly better following a good earnings announcement.

IG issuers remain wary

Despite the promise of $250 billion of cash injections into financial institutions and banks, it wasn't enough to spur issuers into pricing Tuesday.

A rally in the stock market Monday after the plan was announced soon fizzled, as did enthusiasm in the bond market.

"People were excited when the markets rallied Monday," a source said, "but, I don't know, it quickly died down."

The rally happened after the Treasury announced it would use part of the $700 billion bailout plan authorized by Congress for investments into banks, after meeting with heads of the largest banks Monday.

Among other things the government is doing to try to end the economic downturn is guaranteeing debt issued by banks for three years in order to unfreeze credit markets, offering unlimited insurance for non-interest-bearing deposits.

In return for these investments, the Treasury will receive preferred and common stock for those receiving the aid, as well as will place restrictions on executive compensation at the banks.

Tuesday, the stock market had a brief rally at the open but then flattened out. A source said he saw a similar reaction in the bond market.

Also boosting the investment-grade tone slightly was the cementing of an investment deal between Morgan Stanley and Mitsubishi UFJ Financial Group, for a 21% stake. This eased jitters that the deal would not materialize and Morgan Stanley would go deeper into financial trouble.

Tuesday's market tone was similar to what has been seen in recent weeks when a bit of good news comes out, a source said.

"It's kind of like what we've seen before with a large rally," he said. "It kind of slows down afterward."

At the same time, the source said, some things are seen as better in terms of the credit market becoming at least partially unfrozen.

Many issuers are "watching from the sidelines," he said, not wanting to come into the market until another company does.

"People are waiting for price discovery," he said. "They don't want to be the first ones."

The cost to price bonds in this environment is also a deterrent.

Although Treasury prices are down, along with spreads, yields are up, the source said.

"Issuers that are looking at things on a coupon basis," he said, "are seeing spreads in but yields up."

If there are issuers needing to come into the market, it could happen in the next couple of days, a source said. It will all depend on what market conditions look like day to day, he added.

Morgan Stanley higher

Morgan Stanley bonds were generically seen 10 bps to 20 bps higher Tuesday afternoon, a trader said. This came a day after Mitsubishi UFJ Financial cemented its 21% stake in the bank.

Rumors flew late last week that the deal may not materialize, and the two financials renewed talks prior to Monday's announcement.

Johnson & Johnson bonds up

The consumer health company Johnson & Johnson saw some of its bonds do "a little better" Tuesday, a trader said, after announcing positive third-quarter earnings.

The company's 5.15% notes due 2018 were seen at 175 bps bid, 170 bps offered Tuesday afternoon, which was about 3 to 5 bps tighter, he said.

The company reported sales of $15.9 billion for the quarter, up 6.4% from the same time last year. This came after the company raised its guidance for the year.

IBM bonds tighten

Part of the recent three-tranche issue from International Business Machines Corp. was seen significantly tighter from pricing late last week.

The 6.5% notes due 2013 were seen at 335 bps bid around midday Tuesday, a trader said, which was about 50 bps tighter than the price of 387.5 bps over Treasuries.

The 7.625% notes due 2018 saw lighter gains, trading at 353 bps bid, 347 bps offered from the 387.5 bps pricing level.

Bank, broker CDS tighten

Most bank and broker name credit-default swaps were seen sharply tighter Tuesday following Monday's cash injections into banks and other financials.

Bank names were seen better by 60 bps to 145 bps, a trader said, with brokers in anywhere from 285 bps to 310 bps.

Morgan Stanley was "the day's big winner," the trader said, as it tightened around 310 bps to 420 bps bid, 450 bps offered.

Merrill Lynch also fared well, tightening about 85 bps to 175 bps bid, 95 bps offered.

Procter & Gamble big mover

Procter & Gamble Co.'s 5.55% notes due 2037 were seen "moving big," a trader said Tuesday as the company had its annual shareholders meeting.

There were doubts the consumer products company could retain its solid financial outlook amid the current economic woes.

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