Corporate bond sales surged to $15.9 billion yesterday, the busiest day in almost two months, as the Federal Reserve’s move to stimulate the economy ignited a rush of issuers tapping credit markets at record-low interest rates.
Coca-Cola Co., the world’s largest soft-drink maker, raised $4.5 billion in its biggest offering, according to data compiled by Bloomberg. Borrowers including BNP Paribas SA and MetroPCS Communications Inc. sold $2.67 billion more in debt today.
Dow Chemical Co. and Harvard University also took advantage of investment-grade borrowing costs at unprecedented lows after an election divided Congress and the Fed announced a second round of quantitative easing, a plan to buy $600 billion of Treasuries in an effort to slash unemployment and avert deflation. Companies are competing to issue at the cheapest rates, said Didi Weinblatt of USAA Investment Management.
“If I were a corporate treasurer, I’d be issuing everything I need in the next ‘God knows how many years,’” said Weinblatt, vice president of mutual fund portfolios, who helps oversee about $45 billion at USAA in San Antonio. “Companies may think rates are going to get even lower.”
Fed Chairman Ben S. Bernanke’s bond-buying program reinforced optimism that the economy won’t deteriorate and corporate profits will improve. The program may raise U.S. gross domestic product growth by 0.25 percent to 0.5 percent next year and by 0.75 percent in 2012, Deutsche Bank AG senior economist Torsten Slok in New York wrote yesterday in a report.
Record Low Coupon
Coca-Cola’s offering included $1.25 billion of three-year notes at a coupon of 0.75 percent, tying the Atlanta-based company with Wal-Mart Stores Inc. for the lowest rate for that maturity, Bloomberg data show.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 165 basis points, or 1.65 percentage points, down from this year’s high of 201 basis points on June 11, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.393 percent, from 3.451 percent Nov. 3.
The cost of protecting bonds from default in the U.S. fell for a fifth day, reaching the lowest in more than six months. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.9 basis point to a mid- price of 85.4 as of 5:12 p.m. in New York, the lowest since April 15, according to index administrator Markit Group Ltd.
The index falls as investor confidence improves and rises as it deteriorates. 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.
The federal agency that regulates credit unions and insures more than 90 million U.S. accounts plans to sell $5.48 billion of bonds tied to residential mortgage-backed securities.
The debt, which is being sold by Barclays Capital, will have guarantees from the National Credit Union Administration, according to a person familiar with the offering who declined to be identified because the sale isn’t public.
The regulator is disposing of $50 billion in assets including mortgage-related securities from failed institutions, the National Association of Federal Credit Unions said in September.
Borrowing Costs Fall
Average borrowing costs for investment-grade companies fell to 3.53 percent yesterday, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index, the lowest yield since the index began in October 1986.
Coca-Cola led the most U.S. corporate bond offerings since Sept. 8, when sales reached $19.8 billion, Bloomberg data show. Issuance this week of $24.7 billion of bonds compares with $23.9 billion in the five days ended Oct. 29. Average weekly volume this year is $22.6 billion, the data show.
“Business sentiment, the outlook for 2011, the willingness to spend, invest and hire new people have all gotten a marginal push in the right direction over the last couple of days,” said Justin D’Ercole, head of the Americas investment-grade syndicate at Barclays Capital in New York. “Those are all a catalyst for supply, no question.”
Coca-Cola’s 3-year notes yield 32 basis points more than similar-maturity Treasuries, Bloomberg data show. The company also sold $1 billion of 1.5 percent, 5-year notes that paid a spread of 52 basis points; $1 billion of 3.15 percent, 10-year securities at 72 basis points; and $1.25 billion of 18-month floating-rate notes at a spread of 5 basis points over the London interbank offered rate.
The company last issued bonds in March 2009, selling $1.35 billion of 4.875 percent, 10-year notes at a 205 basis-point spread, and $900 million of 3.625 percent, 5-year debt at 185 basis points more than benchmarks, Bloomberg data show.
“Today the market tone is better than it’s probably been since March,” D’Ercole said. “Companies are seizing on the opportunity. They’re thinking about how many actionable days are in November.”
Wal-Mart, the world’s largest retailer, issued $5 billion of debt on Oct. 18, including three- and five-year notes with the lowest interest rates on record. The Bentonville, Arkansas- based company’s $750 million of 0.75 percent notes due October 2013 have climbed 0.5 cent since issue to 100.17 cents on the dollar to yield 0.69 percent, Trace data show.
President Barack Obama, accepting blame for the “shellacking” Democrats took in midterm elections, said Nov. 3 that one of the keys to spurring economic growth will be encouraging corporate expansion and hiring.
The elections were “more important” than the Fed decision “from the standpoint of companies deciding if they want to hire and grow their businesses,” said Tom Murphy, a money manager who helps oversee more than $22 billion of investment-grade credit at Columbia Management in Minneapolis.
Cambridge, Massachusetts-based Harvard, the oldest and richest college in the U.S., sold $300 million of 4.875 percent, 30-year bonds in its first offering of taxable debentures since December 2008, Bloomberg data show.
Dow issued $2.5 billion of debt in a two-part sale. The world’s second-biggest chemical maker after BASF SE may use proceeds for debt repayment, pension contributions, capital expenditures, working capital and acquisitions, the Midland, Michigan-based company said in a regulatory filing.
Today, MetroPCS issued $1 billion of 10-year notes and BNP Paribas sold $650 million of debt due March 2015 in a reopening of an earlier offering, Bloomberg data show.
The Fed announcement confirmed that corporate bonds are a “positive” investment, said Leslie Barbi, a managing director at Guardian Life Insurance Co. of America in New York, who helps oversee $23 billion in fixed-income assets.
“If you were already overweight corporates, you want to be, and if you weren’t, then you certainly want to be now,” Barbi said. “The market action right now is generic. People are not selectively buying this or that.”
Columbia Management’s Murphy said investors are anticipating $75 billion to $100 billion of investment-grade issuance in November.
“Between getting the election and the FOMC out of the way and if we can get past payroll, I definitely think people are going to get as much issuance done as they can between now and Thanksgiving,” he said. “It will be a relatively busy November.”
To contact the editor responsible for this story: Alan Goldstein at firstname.lastname@example.org