Oct. 12 (Bloomberg) -- Borrowers have sold more than $1 trillion in U.S. corporate bonds in 2009, the fastest pace on record, taking advantage of lower rates and government support to bolster cash holdings after last year’s credit freeze.

Citigroup Inc., the third-largest U.S. bank by assets, and General Electric Co.’s finance unit in Stamford, Connecticut, were the year’s biggest issuers, according to data compiled by Bloomberg. Sales compare with $873.2 billion in all of 2008, and $1.17 trillion for 2007, the biggest year for bond sales.

Issuance soared as companies that couldn’t sell debt following the collapse of Lehman Brothers Holdings Inc. in September 2008 grabbed at opportunities to tap the market. Investors reached for yields near the widest on record relative to benchmark Treasury rates, amid a wave of government intervention to repair financial markets, according to Mark Kiesel, global head of corporate debt portfolios at Pacific Investment Management Co., manager of the world’s largest bond fund.

“Credit markets have the wind at their back, thanks to accommodative fiscal and monetary policy from global central banks,” Kiesel wrote this month on Newport Beach, California- based Pimco’s Web site. “Many investors who swung aggressively into credit were rewarded well for the risk they took.”

Spreads Tighten

Corporate bond spreads tightened 4.59 percentage points this year to 3.45 percentage points as of Oct. 9, according to Merrill Lynch & Co.’s U.S. Corporate & High Yield Master index. Spreads narrowed to 3.43 percentage points on Sept. 24, the tightest this year.

Using that index, corporate bonds, including reinvested interest, have returned 23 percent this year, which is better than any full year since 1997, the Merrill Lynch data show.

The Federal Reserve last year cut its target for overnight loans among banks to a range of zero percent to 0.25 percent as the government created programs to free up credit amid the worst crisis since the Great Depression. Financial companies sold $192 billion of debt in 2009 under the Temporary Liquidity Guarantee Program, which opened a new avenue for funding for banks shut out of debt markets since September.

As the government’s efforts to revive credit markets took hold, corporate-bond issuance surged at the beginning of the year “as if somebody had turned a light switch on,” said Chuck Lieberman, chief investment officer at Advisors Capital Management LLC in Hasbrouck Heights, New Jersey.

Trading Down

“A year ago, we were only buying high-quality credit with short maturities,” Lieberman said in a telephone interview. “By early 2009, we had switched completely and were buying BBB and BB, and only long maturities.” Lieberman said his firm is buying BB- and B-rated credit as returns on the higher-quality debt are no longer attractive.

High-yield bonds are rated below BBB- by Standard & Poor’s and less than Baa3 by Moody’s Investors Service.

The difference between investment-grade bond yields and Treasury issues narrowed to 233 basis points on Oct. 9, 30 basis points wider than the average in 2007, according to Merrill Lynch’s U.S. Corporate Master index. Spreads for high-yield debt are 195 basis points wider than the 2007 average, according to Merrill Lynch’s High Yield Master II index. A basis point is 0.01 percentage point.

“I felt the risk spreads were too wide” at the beginning of the year, Lieberman said. “I also saw the Fed’s efforts as likely to bear fruit.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

Last Updated: October 12, 2009 12:23 EDT