Long Bonds Spurned by Borrowers, Lenders as Curve Steepens: Credit Markets
U.S. companies are selling the fewest long-maturity bonds in almost two years as a strengthening economy cuts investor appetite for the debt.
CenterPoint Energy Inc. and Enterprise Products Partners LP are the only issuers of 30-year bonds this month, raising a combined $1.05 billion amid $64.4 billion of sales, according to data compiled by Bloomberg. Last month, $1.5 billion of debt maturing in at least three decades was sold, down 85 percent from a year earlier and the least since April 2009.
Selling long-term debt has become relatively expensive after yields on 30-year Treasuries rose in November to a record compared with 10-year securities. Investors are shunning the bonds amid concern growth may spark inflation, eroding returns.
“We see much less value in long-term bonds for all but the most dedicated buy-and-hold investor,” said Rob Williams, director of fixed-income for Charles Schwab Corp., which oversees $1.5 trillion in client assets and recommends bonds due in 1 to 10 years. “The risk that rates rise and the price falls is high.”
Corporate bonds due in 15 years or more are poised for a fifth consecutive month of declines, losing 0.73 percent in January, while debt maturing in 1 to 3 years has returned 0.15 percent, Bank of America Merrill Lynch index data show. Securities due in 5 to 7 years have gained 0.41 percent and bonds due in 10 to 15 years are up 0.44 percent.
“Issuers look at a very steep yield curve like we currently have, and they tend to gravitate more toward issuing in the intermediate part,” said Jim Probert, managing director and head of investment grade capital markets at Bank of America Merrill Lynch in New York. “There’s probably a trend away from 30-year issuance because of the cost.”
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 168 basis points, or 1.68 percentage points, according to the bank’s Global Broad Market Corporate Index. Yields averaged 3.904 percent.
The cost of protecting company bonds from default in the U.S. fell for a second day. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.8 basis points to a mid-price of 83.3 basis points as of 11:51 a.m. in New York, according to index administrator Markit Group Ltd.
SLM Bonds Rise
The index, which typically falls as investor confidence improves and rises as it deteriorates, has fallen today and yesterday from this month’s high of 89 basis points on Jan. 10.
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.
SLM Corp.’s $2 billion of notes rose in their first day of trading. The largest U.S. student-loan company’s 6.25 percent debt due in January 2016 climbed 1.56 cents to 100.5 cents on the dollar as of 11:54 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulator Authority. Reston, Virginia-based SLM, known as Sallie Mae, issued the bonds yesterday at 98.939 cents, Bloomberg data show.
Economy Gains Strength
Sales of 30-year debt accounted for 2 percent of volume last week as U.S. corporate issuance reached a record $48.7 billion, Bloomberg data show. In November, offerings of bonds due in 30 years or more totaled $8.7 billion, about the average in the first 10 months of the year.
Demand for longer-maturity debt has decreased as U.S. stocks advanced for the sixth straight week in the five days ended Jan. 7, the longest streak since April. ADP Employer Services reported a higher-than-estimated increase in private payrolls, and a private report showed service industries expanded at the fastest pace since May 2006.
The Institute for Supply Management’s non-manufacturing index rose to 57.1 last month, the highest level since 2006. The median estimate in a Bloomberg survey of economists was 55.7.
Yields on company bonds maturing in 15 years or more were at 5.94 percent yesterday, up from as low as 5.37 percent on Aug. 26, Bank of America Merrill Lynch index data show.
As yields rise, longer-dated corporate bonds will become more appealing to investors such as pension funds and insurance companies, said Jason Weiner, a senior fixed-income fund manager in Milwaukee at M&I Investment Management Corp., which oversees about $32 billion.
Last year, “yields had dropped so low, spreads were tight, you were looking at 30-year securities coming in at a record lows,” Weiner said. “Once you start to get close to 6 percent or over 6 percent, buyers step in, especially insurance companies, because they view that as a good long-term return.”
The difference in yields between 10- and 30-year Treasuries widened to 160.3 basis points on Nov. 10, the most on record, and has since receded to 114.8 basis points, Bloomberg data show. That’s double the 56.8 basis point average in the past five years.
Issuers are “finding more interest and ability to place more debt inside of a 10-year than a 30-year at the moment,” said Thomas Chow, a money manager who helps oversee $120 billion of fixed-income assets at Philadelphia-based Delaware Investments. “You’re still dealing with a pretty steep interest rate curve which they’re pricing their debt off of.”
CenterPoint Energy, an electric transmission and distribution utility for the Houston area, sold $300 million of 5.85 percent, 30-year bonds at a 145 basis-point spread and $250 million of 4.5 percent, 10-year notes at a 120 basis-point spread on Jan. 4, Bloomberg data show.
Houston-based Enterprise Products Partners, the largest U.S. pipeline partnership by market value, sold $750 million of 5.95 percent, 30-year bonds that day with a 155 basis-point spread, Bloomberg data show. Those bonds have declined 0.74 cent from issue to 98.577 cents on the dollar, for a spread of 156.4 basis points, Trace data show.
“Investing in long maturity corporates is adding both credit risk and interest-rate risk,” Schwab’s Williams said. “We see quite a bit of risk and not a lot of reward in long- maturity bonds be it Treasuries or corporates.”
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