Shell to Rio Tinto Lead U.S. Bond Sales of $35 Billion in Week

Royal Dutch Shell Plc (RDSA), Europe’s largest oil producer, and miner Rio Tinto Group (RIO) led borrowers selling at least $35 billion in dollar-denominated bonds this week as relative yields narrowed to the lowest level in a year.

While sales fell from $39.2 billion in the five days ended Aug. 10, the busiest period since March, issuance exceeded the weekly 2012 average of $26.6 billion, according to data compiled by Bloomberg. The extra yield investors demand to hold corporate bonds rather than government debt narrowed 3 basis points to 265 basis points, or 2.65 percentage points, the lowest since Aug. 3, 2011, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index.

“Spreads are just so incredibly tight that anybody who wants to issue, or thinks they should issue, is issuing,” said Jody Lurie, a Philadelphia-based corporate credit analyst at Janney Montgomery Scott LLC. “It’s that whole concept of not wanting to wait.”

Companies took advantage of borrowing costs at about record lows, uncertain whether the Federal Reserve will undertake a third round of asset purchases to reduce borrowing costs as the U.S. housing market shows signs of improvement. In Europe, the German and French economies slowed less than expected.

Yields Rise

Yields rose 9 basis points to 4.01 percent yesterday, the first time they’ve exceeded 4 percent since an unprecedented fall below that level on July 18, Bank of America Merrill Lynch index data show. Yields reached a record-low 3.9 percent Aug. 2.

Sales of investment-grade debt were $23.8 billion this week, down from $26.7 billion in the five days ended Aug. 10 and compared with a 2012 weekly average of $20.6 billion, Bloomberg data show.

Shell raised $2.5 billion in a three-part sale with its first bond offering since 2010, Bloomberg data show. The company, which is based in The Hague, sold $1 billion each of 1.125 percent, five-year notes and 2.375 percent, 10-year bonds, and $500 million of 3.625 percent, 30-year debt.

Rio Tinto, the world’s third-largest miner, issued $3 billion in bonds in the London- and Melbourne-based company’s second sale this year, including $1.25 billion of 1.625 percent, five-year notes at a spread of 93 basis points, Bloomberg data show. BHP Billiton and Vale SA are the two biggest mining companies.

Yields on investment-grade debt reached 3.18 percent yesterday, an 11 basis-point increase from 3.07 percent on Aug. 10, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Spreads decreased 1 basis point to 186 basis points. A basis point is 0.01 percentage point.

Speculative-Grade Sales

New-home construction in the U.S. fell in July, while the number of building permits jumped to the highest level in four years, indicating the industry may keep improving in the second half of the year. Building permits, a proxy for future construction, rose to an 812,000 pace, the most since August 2008.

Gross domestic product in the 17-nation euro-area fell 0.2 percent in the second quarter from the first, when it stagnated, the European Union’s statistics office in Luxembourg said Aug. 14. Germany’s economy grew 0.3 percent, compared with economists’ forecast of 0.2 percent, and France’s economy stalled for a third straight quarter, better than an estimated 0.1 percent contraction.

High-yield offerings of $11.2 billion this week are down from $14.5 billion in the five days ended Aug. 10 and compare with a weekly average of $5.9 billion this year, Bloomberg data show. The sales helped bring August issuance of $30.5 billion to the highest on record for the month.

DaVita Offering

Yields on junk debt were unchanged this week at 7.42 percent, Bank of America Merrill Lynch index data show. Spreads decreased 9 basis points to 589 basis points.

DaVita Inc., the dialysis services provider whose biggest shareholder is billionaire Warren Buffett’s Berkshire Hathaway Inc., sold $1.25 billion of 5.75 percent, 10-year bonds at a relative yield of 404 basis points, Bloomberg data show. Proceeds will help the company fund its $4.4 billion acquisition of HealthCare Partners.

“We’re seeing very healthy, strong flows into high-yield bond funds and ETFs,” James Kochan, chief fixed-income strategist at Wells Fargo Fund Management LLC in Menomonee Falls, Wisconsin said in a telephone interview. “There is money to be put to work and the issuers know that.”

To contact the reporter on this story: Sarika Gangar in New York at sgangar@bloomberg.net;

To contact the editor responsible for this story Alan Goldstein at agoldstein5@bloomberg.net;

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