Cameron's Austerity Plan Makes U.K Debts World Beater

Bloomberg

 

British companies are beating the world in the bond market as investors bet Prime Minister David Cameron’s efforts to tame the budget deficit will preserve the U.K.’s top credit rating.

U.K. corporate debt denominated in all currencies returned 3.25 percent last month, the most in a year and the best among the 10 countries making up almost 90 percent of the $6.2 trillion Bank of America Merrill Lynch Global Broad Market Corporate Index. Bonds of Banco Santander SA’s Abbey National unit and Tesco Plc, the nation’s largest supermarket chain, led the gains, returning as much as 12.7 percent.

Cameron’s coalition government is pushing cuts and austerity measures worth 30 billion pounds ($46 billion) a year to shrink the U.K.’s 11 percent deficit to 2.1 percent by 2015. Investors are speculating this will preserve Britain’s AAA credit rating without slowing the economy too much that it curbs the ability of companies to meet their debt payments.

“Investors are happy with the measures taken by Cameron,” said Christian Weber, a senior credit strategist at UniCredit SpA in Munich. “The perception has spread that it’s better to actually tackle budget deficits than just keep spending and spending and spending, because that limits your ability in the future to help your economy stabilize.”

The extra yield investors demand to hold U.K. corporate bonds instead of benchmark government securities narrowed 4 basis points to 237 basis points in August, or 2.37 percentage points, compared with an increase of 6 basis points for U.S. company debt, according to Bank of America Merrill Lynch’s global index. Spreads widened an average 4 basis points across all countries in the index last month and were unchanged yesterday at 180 basis points. Yields averaged 3.558 percent.

Government Bonds

U.K. government bonds are also rallying. They returned 4.7 percent last month, second only to Denmark’s 4.75 percent, according to the Bank of America Merrill Lynch Global Sovereign Broad Market Plus index.

Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. fell after a report showed companies added more jobs than forecast in August. Auto- parts supplier Continental AG sold Europe’s first high-yield bond in a month and Citigroup Inc. will hold a meeting next week with investors to discuss the financing for the acquisition of Tomkins Plc.

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 1.25 basis points to a mid-price of 105 basis points as of 11 a.m. in New York, the lowest since Aug. 10, according to index administrator Markit Group Ltd.

August Payrolls

The measure fell after private payrolls that exclude government agencies climbed 67,000, after a revised 107,000 increase in July that was more than initially estimated, Labor Department figures in Washington showed. The median estimate of economists surveyed by Bloomberg News called for a gain of 40,000. Overall employment fell 54,000 for a second month and the unemployment rate rose to 9.6 percent as more people entered the labor force.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 2.5 basis points to 106, and the Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 8 basis points to 483, according to Markit.

Continental Sale

The indexes typically fall as investor confidence improves. Credit 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 $10 million of debt.

Continental, Europe’s second-largest auto parts supplier, sold 1 billion-euros ($1.3 billion) of seven-year bonds. The debt from the Hannover, Germany-based company priced to yield 7.625 percent, compared with 8.75 percent on five-year securities it sold on July 9, according to data compiled by Bloomberg.

Banco Bilbao Vizcaya Argentaria SA and Telefonica SA also sold bonds, putting this week on track to be the highest for European debt issuance in a month, Bloomberg data show. Sales of corporate and covered bonds total 15 billion euros this week, the most since the period ended July 30 and up from 12.6 billion euros last week.

Tomkins Financing

Citigroup will hold a meeting Sept. 8 at 10 a.m. New York time for the Tomkins financing, said a person familiar with the transaction, who declined to be identified because the talks are private.

Canada Pension Plan Investment Board and Onex Corp. have agreed to buy London-based Tomkins, a maker of auto parts and building materials, for 2.89 billion pounds, according to a July 27 statement. They will fund the acquisition with $3 billion of underwritten debt.

Leveraged loan prices rose for the second day to the highest since Aug. 23. The Standard & Poor’s/LSTA US Leveraged Loan 100 Index increased 0.09 cent to 89.51 cents on the dollar. Loans have returned 4.1 percent in 2010, based on the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans.

Most-Traded Bonds

Bonds from Fairfield, Connecticut-based General Electric Co., the world’s biggest maker of jet engines, were the most actively traded U.S. corporate securities by dealers, with 87 trades of $1 million or more, Bloomberg data show. The most active in junk bonds was Anadarko Petroleum Corp., the U.S. partner in BP Plc’s damaged Gulf of Mexico well, with 78 trades.

Junk bonds and leveraged loans are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.

Bonds of Apache Corp. declined by the most since they were issued after an explosion aboard a Mariner Energy Inc. platform in the Gulf of Mexico yesterday.

Apache’s $1.5 billion of 5.1 percent debt due in 2040 declined 3 cents to 98.9 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Houston-based energy company sold the bonds on Aug. 17 at 98.936 cents on the dollar, Bloomberg data show.

In emerging markets, the yield spread narrowed by 4 basis points to 281 basis points, according to index data from JPMorgan Chase & Co. The spread has decreased 15 basis points since Aug. 30.

Best Performers

French bonds were the second best-performing notes of the 10 countries after U.K. company debt gaining 2.46 percent, with Canadian securities third at 2.38 percent, according to Bank of America Merrill Lynch indexes. The global average was 2.14 percent. For the year, Britain’s company debt has handed investors 9.56 percent, overtaking U.S. corporate notes, which returned 9.55 percent.

Abbey National’s 167 million pounds of zero-coupon notes due 2038 were the best-performing U.K. corporate bonds in August, with a 12.7 percent return, while Cheshunt, England- based Tesco’s 287.5 million pounds of 5.2 percent notes due 2057 gained 10.5 percent, Bank of America Merrill Lynch index data show. The 135 million pounds of zero-coupon bonds due in 2038 issued by Barclays Plc, the third-largest U.K. lender, were the third-best performers, returning 10.2 percent.

“The benefit of the doubt has been granted to U.K. companies for the time being” in terms of the economy, helping the bonds, said Lucette Yvernault, who helps oversee the equivalent of about 7 billion euros as a money manager at Schroders Investment Management Ltd. in London.

Austerity Measures

Austerity measures in the wake of Europe’s sovereign deficit crisis in April will weigh on economic growth and increase the risk of credit rating cuts for some nations, Moody’s said in its semi-annual European Sovereign Outlook on Aug. 23.

The U.K., along with Germany and France, is likely to keep its top rating, Moody’s said. S&P affirmed the U.K.’s AAA rating on July 12, saying planned budget cuts supported the top grade.

The U.K. will announce measures to slash most departments’ budgets by about 25 percent in October as it seeks to tackle a deficit that as a percentage of the economy is greater than the U.S.’s 9.1 percent and the 6.3 percent average for euro-region nations. A total 490,000 public-sector jobs will be lost by April 2015 under the measures being carried out by Chancellor of Exchequer George Osborne, according to Treasury estimates.

Currency Markets

Bonds sold by British companies have returned 5.17 percent since a June 22 emergency budget weeks after Cameron’s Conservative-Liberal coalition came to power replacing the Labour Party’s 13-year reign. Bank of America Merrill Lynch’s broader index gained 3.71 percent in the period.

Credit-default swaps measuring perceptions of sovereign credit quality also show the U.K. outperforming its peers, with the cost of five-year debt insurance tumbling $17,500 since the start of the year to $65,000 annually for a $10 million contract. In the same period, the swaps on the Markit iTraxx SovX Western Europe of 15 countries climbed $72,000 to $141,000, according to CMA.

Currency markets are speculating Cameron’s cuts will hurt economic growth and weaken the pound, which fell to $1.5327 today, down from last month’s high of $1.5999 on Aug. 6.

Spreads on company bonds of only two other nations besides the U.K. narrowed in August, with a 4 basis-point drop on Netherlands securities and a 2 basis-point decline for Japanese corporate notes, Bank of America Merrill Lynch indexes show.

A lack of supply of new bonds in pounds has also helped British company debt, and means any increase in demand boosts the securities “disproportionately,” said Suki Mann, head of credit strategy in London at Societe Generale SA, France’s second-largest bank.

Companies sold 119 million pounds of bonds in the U.K. currency in August, the second-slowest month since at least 1998, according to data compiled by Bloomberg. The month with the least issuance was May, with 34 million pounds of bonds.

UK's Cameron: Previleged, but with a Common Touch

Seattle Times

LONDON — Conservative leader David Cameron walked into No. 10 Downing Street on Tuesday night as Britain's new prime minister, ending five days of political limbo and 13 years of Labour Party rule after forging a historic coalition that spans the country's political spectrum.

The deal that brought Cameron to power after indecisive elections last week united the Conservatives and the Liberal Democrats in Britain's first coalition government since Winston Churchill's war cabinet in the 1940s.

Cameron, a self-described conservative "modernizer" who has embraced gay rights and green policies, agreed to give the post of deputy prime minister to the Liberal Democrats' leader, Nicholas Clegg, a champion of the poor. The Liberal Democrats, who actually lost seats last week, also won four other cabinet posts and prevailed in their demand for a referendum on broad electoral reform that could aid their party in future elections by giving more weight to the overall popular vote in deciding Parliament seats.

Voters gave the Conservatives more votes and more seats than any other party, but not the majority they needed to govern alone. The Liberal Democrats finished third, behind outgoing Prime Minister Gordon Brown's Labour Party, which suffered its worst defeat in 80 years.

Brown tendered his resignation to Queen Elizabeth II even before the Conservatives and Liberal Democrats had completed their negotiations. Cameron then followed Brown in meeting with the queen, and in a swift handoff that contrasts dramatically with the long transition between presidential administrations in the United States, Cameron spoke for the first time as prime minister eight minutes after leaving Buckingham Palace.

President Obama called Cameron, at 43 Britain's youngest prime minister in nearly two centuries, to congratulate him. The new government is unlikely to bring major changes in transatlantic ties. Though Clegg has sought a more independent line with the U.S. and vowed to bring British troops home from Afghanistan within five years, the Liberal Democrats have not advocated an immediate withdrawal, and the key post of foreign secretary went to William Hague of the Conservatives, who are staunch backers of the special relationship.

Despite their victory, the parties making up the new coalition are the strangest of political bedfellows.

The Liberal Democrats conceded on Conservative plans to begin slashing Britain's yawning budget deficit this year and signed on to a plan to keep and upgrade Britain's nuclear deterrent.

The Conservatives, meanwhile, agreed to offer tax relief to some of Britain's poorest citizens and scrap a plan to offer inheritance-tax breaks to some of its wealthiest.

Yet sharp differences remain in other areas, particularly on the issue of relations with Europe. The Conservatives have vowed more independence from the European Union, a position the Liberal Democrats strongly oppose. As part of the deal, Clegg reportedly agreed not to press for a switch from the pound to the euro during the term of the coalition, but broader ties with Europe still appeared set to be a lightning rod.

Their leaders appear to share a measure of chemistry; Cameron, for instance, is generally seen as standing to the political left of his base and Clegg to the right of his. But far-right Conservatives and fiercely progressive Liberal Democrats were grumbling Tuesday about an unholy union that some analysts say may not survive the five-year term ahead.

"Margaret Thatcher would have kittens," the Conservative-leaning Telegraph newspaper declared about the prospect of a deal.

"It's going to be a very interesting and hairy ride," said Steven Fielding, director of the Center for British Politics at Nottingham University. "We've got a set of politicians who aren't used to coalition government and who are going to have to learn on the job, in the midst of one of the worst economic crises we've ever lived through."

One thing Cameron does have is flexibility, said Peter Snowdon, author of "Back From the Brink: The Inside Story of the Tory Resurrection."

"He's more pragmatic than ideological," he said. "He was brought up in rural England and he considers things like family life and the state of the British union very important. But to him, most things are up for debate, for framing and discussing and forging positions on."

Stat Sheet:

David Cameron

Age: 43, the youngest prime minister since the 2nd Earl of Liverpool ran the government in the early 19th century.

Background: The third of four children, Cameron had a privileged childhood in a small Berkshire village. His father, Ian, was a stockbroker and the chairman of the London gentlemen's club Whites.

Education: When he was 7, Cameron was sent to Heatherdown, a prep school whose alumni include Princes Andrew and Edward. Cameron then went to Eton, the traditional finishing school for Britain's ruling classes, where it was reported that, as punishment for getting caught smoking marijuana, he was made to copy 500 lines of Latin text. At Oxford, he was a member of the notorious Bullingdon Club, whose agenda consisted of getting dressed up, getting drunk and getting out of trouble by paying off the people whose things were destroyed in club bacchanalias.

Family: He is married to Samantha, whose father is a baronet and whose stepfather is a viscount. They have two young children. A son, Ivan, was severely disabled and died last year and the couple are expecting another child in the fall.

Career: When he was 21, Cameron began a series of political jobs with the Conservative Party, starting in its research department. He then spent several years working as head of corporate affairs for Carlton Communications, a media company. He first ran for Parliament in 1997. He lost, but was elected four years later, to the safely Conservative seat of Witney in Oxfordshire. After he was elected leader, he aggressively sought to bring more women and minorities into the party and into Parliament. He promoted environmental issues and spoke out in favor of gay rights and civil partnerships.

Campaign: The big idea of his campaign was something he called the big society, the notion that rather than depending on government to provide their needs, people should look to community and volunteer organizations.