AT&T Announcement Triggers Relief Rally in Treasuries

The company's corporate bond issue, the biggest ever, is smaller than feared.

Author:: Elizabeth Roy Stanton
Publish date:: Mar 22, 1999 11:43 AM EST

Bond prices popped into positive territory within the last hour after

AT&T

launched a corporate bond deal that is the largest ever but substantially smaller than many market participants feared it would be.

The benchmark 30-year Treasury bond, down as much as 6/32 at 8:22 a.m. EST, lately was up 6/32 at 95 26/32, dropping its yield a basis point to 5.54%.

AT&T launched a $7 billion deal, comprising $1.75 billion of five-year, $2.5 billion of 10-year and $2.75 billion of 30-year securities. At a launch, underwriters announce how much debt will be sold and begin the process of determining how much investors will pay for it. The company is expected to price the deal tomorrow morning.

With the deal, AT&T breaks

MCI WorldCom's

(WCOM)

record for the biggest corporate bond deal, $6.1 billion, set last summer. But the announcement triggered a relief rally in the Treasury market because

last week, Treasuries got clocked by rumors that the deal could exceed $10 billion.

The company had preliminarily sized the deal at $5 billion to $6 billion, but its regulatory filings through January allow it to issue up to $13 billion. And on Friday, an announcement by underwriters

Merrill Lynch

and

Salomon Smith Barney

that investors had placed orders for $11.5 billion of bonds encouraged speculation that the deal might be radically re-sized.

This morning before the launch,

Thomson Global Markets

senior analyst John Atkins said expectations had become more realistic, with most participants expecting an $8 billion deal. So the deal is only somewhat smaller than expected. Still, the announcement was enough to give Treasuries a significant lift.

The prospect of a huge corporate deal weighs on Treasuries because of the fear that investors will exchange Treasuries for the new corporate bonds. Even if investors opt to exchange other corporate issues for the new ones, dealers might sell Treasuries as a hedge when they take the old corporate issues into their inventories,

Miller Tabak Hirsch

chief bond market strategist Tony Crescenzi explained. "At a minimum, it does have the potential effect of taking money out of Treasuries," he said.