Citigroup Inc. (C), the third-biggest U.S. lender, and analog chipmaker Texas Instruments Inc. (TXN) led a 7 percent increase in dollar-denominated corporate bond sales this week as yields fell to record lows.
Texas Instruments sold $1.5 billion of bonds at unprecedented rates for three- and seven-year debt and Citigroup raised $1.25 billion, according to data compiled by Bloomberg. Sales of $24.7 billion compare with $23 billion last week and a 2012 weekly average of $26.1 billion.
Issuers attained record-low coupons as borrowers sought a haven from more volatile assets. U.S. bonds have recorded positive returns for six straight quarters, while global stocks have fallen for three of those periods. Investors are being drawn to higher-grade bonds that “fit the bill” by providing excess yield, diversification, duration and liquidity, said Thomas Chow of Delaware Investments.
“Investment-grade is still a risk sector but, on a relative basis, it should hold much better than high yield, emerging markets and certainly equities if we get some left field-type of surprises,” Chow, a money manager based in Philadelphia, said in a telephone interview.
The Standard & Poor’s 500 index fell the most since July 24 yesterday after European Central Bank President Mario Draghi failed to reassure investors he was ready to take immediate steps to support the economy, following his pledge last week to do “whatever it takes” to preserve the euro.
Yields on debt from the most creditworthy to the riskiest borrowers dropped to a record-low 3.902 percent yesterday, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master index. (MXWD) The rate stood at 4.245 percent on June 30.
U.S. company bonds returned 2.25 percent in the second quarter compared with a 6.36 percent loss in the MSCI All- Country World Index of equities.
Investment-grade sales of at least $16 billion this week compare with $18.5 billion in the five days ended July 27 and a 2012 weekly average of $20.6 billion, Bloomberg data show.
Texas Instruments Inc. sold $750 million each of three-year notes at 0.45 percent and seven-year bonds at 1.65 percent, the lowest coupons on record for dollar-denominated bonds of those maturities, Bloomberg data show. Unilever NV (UN) matched the three- year coupon in its $1 billion sale of three- and five-year bonds.
“Investment grade is really one of those sweet spot-type asset classes where you have fundamentals that are sound and valuations that are attractive, or, at a minimum, are satisfactory,” Chow said.
Yields on investment-grade debt decreased to 3.03 percent yesterday, the lowest ever, from 3.09 percent on July 27, according to the Bank of America Merrill Lynch U.S. Corporate Master index. The extra yield investors demand to own the bonds versus government debentures decreased 1 basis point to 194 basis points.
The Federal Reserve said it will ease policy further if necessary to boost the economy and reduce unemployment in an Aug. 1 statement following a two-day meeting in Washington. The central bank reiterated that economic conditions would probably warrant holding the benchmark Fed funds rate near zero “at least through late 2014.”
Companies rushed to issue bonds in the days before the announcement, Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. The week got off to its busiest start since March 19 with $10.7 billion in sales on July 30, Bloomberg data show.
Citigroup, in its first dollar-denominated benchmark offering in five months, sold $1.25 billion of 2.25 percent three-year notes at a spread of 205 basis points, the data show.
The rush helped U.S. issuance reach $102.7 billion and global issuance reach $295.6 billion in July, both the busiest on record for the month, the data show. Yields on global investment-grade debt tumbled to an unprecedented 2.981 percent yesterday, according to Bank of America Merrill Lynch index data.
The European Central Bank refrained from cutting interest rates yesterday, leaving the benchmark rate at a record low of 0.75 percent. Draghi signaled the ECB intends to join forces with governments to buy enough bonds to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.
“It’s much more macro risks that are playing upon risk sentiment,” Chow said. ”It’s not specific idiosyncratic risk. We’re not expecting a large amount of defaults.”
Sales from high-yield borrowers rose to $8.7 billion this week compared with $4.5 billion in the period ended July 27 and a 2012 weekly average of $5.5 billion, Bloomberg data show.
CIT Group Inc. (CIT), the small-business lender that exited bankruptcy two years ago, sold $3 billion of bonds rated B1, the fourth-highest level of speculative-grade, by Moody’s Investors Service, Bloomberg data show. The issue included $1.75 billion of 4.25 percent, five-year notes at a spread of 364 basis points.
Yields on junk debt decreased to 7.5 percent yesterday from 7.61 percent on July 27, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. Spreads decreased 9 basis points to 613 basis points.
High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Planned sales include a $750 million offering from New Delhi-based Rural Electrification Corp. and a $250 million offering from cable company WaveDivision Holdings LLC, Bloomberg data show.
Bonds from higher-rated companies that issue infrequently are seeing strong demand, Lurie said. These securities help investors diversify, especially when they have filled their allocations for buying debt from specific issuers.
Investors “are trying to figure out where to put their money to use,” Lurie said. “The question that everybody keeps asking is ‘Okay, well, who hasn’t issued in a while?”’
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