Debt from Massachusetts Institute of Technology, Princeton University and Harvard University were the top performing U.S. investment-grade bonds in August as the highest-rated securities lured investors concerned that the economy is slowing.
The bonds, which trade above 120 cents on the dollar, rallied at least 9 percent, according to Bank of America Merrill Lynch index data. MIT’s $750 million of 100-year bonds gained the most, jumping to 121.9 cents on the dollar on Aug. 26 from 104 cents in July, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Taxable debt from some of the world’s rich educational institutions, graded Aaa by Moody’s Investors Service and AAA by Standard & Poor’s, is being viewed as a haven as economists cut growth forecasts and consumer confidence plunges to the lowest in more than two years. Debt with the top credit grades rallied 2.3 percent, while speculative-grade debt lost 4 percent in August, the worst month since November 2008, Bank of America Merrill Lynch index data show.
“Risk aversion, a flight to quality and also with S&P downgrading Treasuries to AA+, I think it’s enhanced the bid for AAA securities because there aren’t that many left,” said James Lee, a senior analyst at Calvert Investments, which oversees $14.5 billion, in Bethesda, Maryland. MIT, Princeton and Harvard have “a strong franchise, a long, long history of operating performance with substantial tuition revenue and a relatively light debt load,” he said.
Bank of America Merrill Lynch’s U.S. Corporates, AAA Rated index has a market value of $60 billion and makes up 1.6 percent of the broader investment-grade index, the data show.
Returns on the AAA securities in August surpassed overall investment-grade debt, which rose 0.1 percent and trailed Treasuries, which gained 2.8 percent.
U.S. government bonds advanced even after S&P lowered the U.S.’s credit rating to AA+ from AAA on Aug. 5, saying the government is becoming “less stable, less effective and less predictable.”
“The whole theme of the last four months has been a flight to quality,” Lee said.
Harvard’s endowment was the biggest in the Ivy League, at $27.6 billion, followed by Yale with $16.6 billion and Princeton with $14.4 billion as of June 30, 2010, according to Bloomberg rankings. MIT is not an Ivy League school.
Princeton’s $500 million of senior unsecured 5.7 percent debt due in 2039 gained 10.2 percent to 123.4 cents on the dollar, Bank of America Merrill Lynch index data show. These bonds yielded 4.3 percent on Aug. 17, Trace data show.
Harvard’s $500 million of 6.5 percent bonds maturing the same year rallied 9.8 percent to 136.4 cents on the dollar, the index data show.
MIT, the Cambridge, Massachusetts-based school which counts Federal Reserve Chairman Ben S. Bernanke and former U.S. Treasury Secretary Lawrence Summers as alumni, sold the bonds in May to support capital projects and to refinance outstanding debt, according to preliminary offering documents.
The yield of MIT’s 100-year bonds fell to 4.58 percent on Aug. 26 from 5.38 percent on July 8, according to Trace.
Harvard, located in Cambridge Massachusetts, sold its notes in December 2008 to repay commercial paper, while Princeton, located in Princeton, New Jersey, followed in January 2009 with proceeds slated for working capital, according to data compiled by Bloomberg.
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