May 22 (Bloomberg) -- Sales of U.S. investment-grade debt surged to a record $128.5 billion this month as investor demand was spurred by speculation that companies will be able to withstand an economic slowdown.

GlaxoSmithKline Plc, Europe's biggest drugmaker, and tobacco company Philip Morris International Inc. were among companies selling debt. Sales are more than double the monthly average of $60.1 billion since 1999, according to data compiled by Bloomberg. Issuance compares with $122.6 billion for all of May 2007 and $122.3 billion during April, now the second and third busiest months.

``Investors continue to be willing to absorb anything that gets thrown at them,'' said Vincent Murray, head of investment- grade syndicate at ABN Amro Holding NV in New York.

Sales of investment-grade bonds began to accelerate in mid- April, a month after the Federal Reserve backed a bailout of Bear Stearns Cos., emboldening investors to take on more risk. Concerns in credit markets that banks may fail eased after the Fed stepped in, said Adriaan van der Knaap, co-head of debt capital markets at UBS AG in New York.

Industrial companies have raised $36.9 billion so far this month, the most ever and more than double the $17.2 billion sold in all of May 2007, according to Bloomberg data.

``The strength in high grade this year has been driven by non-financials with financial supply just recently picking up,'' Bank of America Corp. analysts led by Hans Mikkelsen in New York said in a May 19 report.

High-Yield

Demand is also increasing for high-yield, high-risk debt. Sales rose to at least $12.3 billion this month, the most since October, Bloomberg data show. Nortel Networks Corp., DirecTV Group Inc. and Dish Network Corp. were among companies tapping the market. High-yield companies are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

Sales of investment-grade bonds this year have surged to $466.2 billion, 7.4 percent more than in the same period in 2007, Bloomberg data show.

``There's a lot of cash sitting on the sidelines that wants to get back in the market,'' Jim Hannan, managing director for fixed-income strategy at MTB Investment Advisors in Baltimore, which oversee $4 billion of fixed-income assets.

Investment-grade debt sales were 16 percent behind the record pace of 2007 as of March 14, two days before the Fed backed JPMorgan Chase & Co.'s bid to buy Bear Stearns. Seven of the top 12 biggest offerings of the past five years have occurred since April 16.

GlaxoSmithKline, Philip Morris

London-based GlaxoSmithKline raised $9 billion on May 6 in the largest U.S. bond offering in six years. A week later, New York-based Philip Morris, spun off in March by Altria Group Inc., sold $6 billion of debt, tied with five issuers for the fourth- biggest offering this year.

Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada rose about 3.75 basis points to 104 basis points as of 11:30 a.m. in New York, according to CMA Datavision. The index still is at about half its all-time high on March 14. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. A drop indicates an improvement in the perception of credit quality.

The cost of protecting corporate bonds fell because the Fed made itself a ``backstop to the financial system,'' said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management.

`Heart Beat'

The market ``was basically comatose for a while there,'' said Mikelic, who helps oversee $22 billion in assets in Grand Rapids, Michigan. ``Now you're getting a heart beat.''

The extra yield investors demand to own investment-grade debt narrowed to 249 basis points on May 16, the lowest since Feb. 28, according to Merrill Lynch & Co.'s U.S. Corporate Master index. Spreads reached a record high of 305 basis points on March 20. A basis point is 0.01 percentage point.

Earlier in the year, companies were paying as much as 35 basis points on top of the secondary-market spreads to entice investors to buy new bonds, Mikelic said. Now the new issue premium has ``pretty much collapsed, disappeared,'' he said.

To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

Last Updated: May 22, 2008 12:48 EDT