Goldman Sells Bonds as Yields Drop to Lowest in Six Years: Credit Markets
U.S. President Barack Obama
Chip Somodevilla/Pool via Bloomberg
President Barack Obama signed into law the biggest financial regulatory overhaul since the Great Depression.
President Barack Obama signed into law the biggest financial regulatory overhaul since the Great Depression. Photographer: Chip Somodevilla/Pool via Bloomberg
Goldman Sachs Group Inc. and Morgan Stanley led $14.2 billion in U.S. corporate bond sales in the busiest day in almost four months as yields on company debt fell to the lowest in six years.
Goldman Sachs raised $3 billion in a two-part bond offering yesterday, its biggest since January 2009, according to data compiled by Bloomberg. Morgan Stanley also issued $3 billion of debt after it reported second-quarter earnings that surpassed analyst estimates.
Companies from Wynn Resorts Ltd. of Las Vegas and oil driller Noble Corp. to Wall Street banks sought lower borrowing costs as average yields on U.S. corporate debt declined to 5.104 percent, the least since April 2004. Federal Reserve Chairman Ben S. Bernanke said yesterday the economic outlook is “unusually uncertain,” while President Barack Obama signed into law the biggest financial regulatory overhaul since the Great Depression.
“Companies are taking advantage of good earnings reports and extremely attractive borrowing levels,” said James Kochan, chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, which manages $179 billion. “It’s hard to see any factors that would push yields up significantly.”
The extra yield investors demand to own bank bonds instead of Treasuries has fallen 25 basis points this month to 249 basis points, or 2.49 percentage points, Bank of America Merrill Lynch index data show. That’s outpacing the 17 basis-point decline in spreads in the overall U.S. corporate bond market.
‘Extra Juice’
Bank bonds still remain “cheap” even as investors gain confidence the U.S. legislation won’t cripple profits at financial companies, said Michael Johnson, chief market strategist at M.S. Howells & Co., a broker dealer in Scottsdale, Arizona.
“There’s been a hangover on the banks and financials for a while, and it just seems as if investors at this point should be looking to pick up some of that extra juice,” Johnson said.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt fell 2 basis points to 185 basis points, the lowest since May 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields fell to 3.815 percent from 3.854 percent on July 20.
Credit-Default Swaps
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, declined 3 basis points to a mid-price of 108.6 basis points as of 12:40 p.m. in New York, according to index administrator Markit Group Ltd. The index typically falls as investor confidence improves.
The cost of insuring against losses on European corporate bonds fell to the lowest in a month, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 mostly junk-rated companies dropped 8.6 basis points to 512.9, the lowest since June 21, Markit prices show.
The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in investor perceptions of credit quality. High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Ford Motor Co. canceled a planned sale of asset-backed debt, the Wall Street Journal reported on its website, citing market participants it didn’t name. The carmaker scrapped the offering after credit ratings firms banned the use of their debt grades in bond sale documents on concern they will be exposed to new liability under the financial regulation reform bill, the Journal said.
Brenda Hines, a spokeswoman for lending arm Ford Motor Credit, declined to comment.
Most-Traded
Morgan Stanley bonds were the most-traded U.S. corporate debt by dealers yesterday, with 253 trades of $1 million or more, followed by Goldman Sachs, with 170, Bloomberg data show. Anadarko Petroleum Corp. had the most active junk bonds with 48 trades.
“A lot of people feel that the corporate market is the only place there’s decent value,” said Wells Fargo’s Kochan. “Spreads on bank paper are still pretty wide, so if you’re looking for one area of the U.S. debt market that has value, you’re forced into corporates, and particularly banks and financials.”
The Goldman Sachs offering consisted of $2.25 billion of 5- year, 3.7 percent notes that yield 205 basis points more than similar-maturity Treasuries and $750 million of 10-year, 6 percent debt that priced at a 230 basis-point spread, Bloomberg data show. The 2020 securities are a reopening of a May offering.
‘Fragile Growth’
Morgan Stanley issued $1.25 billion of 4 percent debt due in 2015 at a spread of 245 basis points and $1.75 billion of 5.5 percent notes maturing in 2020 that pay 270 basis points more than benchmarks, Bloomberg data show.
The New York-based company’s shares surged 6.3 percent, the biggest gain since July 13, 2009, after it posted second-quarter net income of $1.96 billion, or $1.09 a share. Earnings from continuing operations were 80 cents a share, including a 20-cent tax benefit, compared with the 47-cent average estimate of 21 analysts surveyed by Bloomberg.
“The economy still is in a fragile growth stage, so the Federal Reserve is keeping a fairly steep rates curve, which is enabling banks to make money the old fashioned way, to borrow short and lend long,” said Tom Farina, a director at Deutsche Insurance Asset Management in New York, who helps manage $188 billion of assets.
Wynn Debt
The yield on two-year Treasuries fell to a record-low 0.5519 percent today after Bernanke said the Fed is ready to “take further policy actions as needed.”
U.S. corporate bond issuance was the highest since March 23, when borrowers raised $14.4 billion, Bloomberg data show.
Wynn Resorts, billionaire Stephen Wynn’s casino operator, issued $1.32 billion of first mortgage bonds in the company’s biggest debt offering, Bloomberg data show. Geneva-based Noble, the world’s second-largest offshore driller by fleet size, sold $1.25 billion of debt in a three-part offering.
To contact the reporters on this story: Tim Catts in New York at tcatts1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
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