Bond Buyers Extract Concessions on New U.S. Debt as Haven Wanes
Investors are extracting concessions on new corporate bonds in the U.S. for the first time since June as an improving economy gives them less cause to seek a haven in the debt.
Companies from Rio Tinto Group to Philip Morris International Inc. (PM) that issued $24 billion of investment-grade debentures last week paid an average of 1 basis point more in relative yield than investors accepted for their outstanding bonds with similar maturities, according to Barclays Plc data. Sales in the prior five weeks priced at levels that on average either matched existing spreads or were tighter by as much as 4 basis points.
Issuers were “running into a buyers’ strike,” Rob Crimmins, a money manager in New York at RS Investments, which oversees $30 billion, said in a telephone interview. “Investors just didn’t want to be investing in the long end at those absolute levels. So you start to get some push back.”
Dollar-denominated investment-grade corporate bond sales fell 10 percent last week as demand cooled with data showing the worldwide economy is stronger than investors anticipated. Even with the drop, August sales of $54.6 billion already exceed the total in the same month last year by $2.6 billion as companies have sought to lock in borrowing costs near record lows, according to data compiled by Bloomberg.
“People are pausing a bit,” William Larkin, a fixed- income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “When markets start to indicate a change, it’s better to be cautious because you might be stepping in front of a train.”
Average concessions compare with -4 basis points last week, the lowest level since the week ended Feb. 10, Barclays data show. Concessions were last positive in the five days ended June 28, when the figure reached 11 basis points.
Employment increased by 163,000 last month, helped by a pickup at automakers and health-care providers, after a revised 64,000 June advance, Labor Department data showed. The median estimate of 89 economists surveyed by Bloomberg called for a rise of 100,000.
Retail sales by auto dealers to department stores rose 0.8 percent in July, the biggest gain since February and the first increase in four months, according to Commerce Department figures released on Aug. 14.
Rio Tinto Group (RIO), the world’s third-largest mining company, sold $3 billion of debt on Aug. 16, including $1 billion of 2.875 percent, 10-year debt, Bloomberg data show. The securities priced at a relative yield of 120 basis points, compared with an 88 basis-point spread from an Aug. 15 trade on its March 2022 bonds, or a 32 basis-point concession, according to Bloomberg data and Trace.
Philip Morris, the largest publicly traded tobacco company, raised $2.25 billion in a three-part offering on Aug. 14, Bloomberg data show. The New York-based company’s $750 million of 1.125 percent, five-year securities priced at a spread of 60 basis points, or a 14 basis-point concession to its March 2017 debt, which traded on Aug. 10 with a 46 basis-point spread, according to Bloomberg and Trace data.
Yields on investment-grade bonds reached 3.145 percent yesterday, 11 basis points above a record-low 3.032 percent on Aug. 2, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
“Demand is still significant,” said Jon Duensing, the Colorado-based head of corporate credit at money manager Smith Breeden Associates. The increase in concessions “is not an indication of inability for companies to still access attractive all-in financing.”
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