Sales of corporate bonds in the U.S. fell 63 percent this week and relative yields narrowed as companies began reporting third-quarter results amid mounting concern that earnings have peaked.
Mizuho Financial Group Inc. (8411), Japan’s third-biggest bank by market value, and Hudson, Ohio-based Jo-Ann Stores Inc. led borrowers selling at least $15.7 billion of debt, following $41.9 billion in the five days ended Oct. 5, according to data compiled by Bloomberg. Sales were the lowest since $5.5 billion in the period ending Aug. 31 and compare with a 2012 weekly average of $28 billion.
Signals are increasing that economic growth is tapering off, making it harder for borrowers to repay obligations. Third- quarter profits and sales for Standard & Poor’s 500 companies probably fell in unison for the first time in three years, according to analyst estimates compiled by Bloomberg. The International Monetary Fund lowered its global growth forecast to the slowest pace since 2009. With many U.S. companies restricted from issuing during earnings-related blackout periods, others are stepping in, Janney Montgomery Scott LLC’s Jody Lurie said.
There’s “potential for a lot of international issuers tapping the market, and high-yield issuers who aren’t public,” Philadelphia-based Lurie, a corporate credit analyst, said in a telephone interview. “We’ve seen some of that already. Those two buckets are where the supply is going to come from.”
Yields on bonds from the most creditworthy to the riskiest borrowers stood at an unprecedented low 3.647 percent yesterday, down from 3.7 percent on Oct. 5, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master index. The extra yield investors demand to own corporate bonds decreased 2 basis points to 238 basis points this week.
Sales of investment-grade debentures during the shortened holiday week reached at least $9.6 billion, compared with $28.4 billion last week and a 2012 weekly average of $21.5 billion, Bloomberg data show.
Mizuho raised $2.5 billion through its Mizuho Corporate Bank Ltd. unit, selling $1.5 billion of 1.55 percent, five-year securities at a relative yield of 90 basis points and $1 billion of 2.95 percent debt due in 2022 at a spread of 130 basis points, Bloomberg data show.
Yields on investment-grade debt fell to an unprecedented 2.808 percent yesterday, from 2.865 percent on Oct. 5, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Spreads decreased 3 basis points to 159 basis points this week.
’’I’m getting a bit nervous because there’s a lot of signs that the market is getting expensive,’’ 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. ’’Exchange-traded funds and mutual funds are basically at record size because inflows are so strong. Any time that happens, as a buyer, you have to be very careful.’’
Offerings of speculative-grade bonds reached at least $6.1 billion, compared with $13.5 billion last week and a 2012 weekly average of $6.4 billion, Bloomberg data show.
Jo-Ann Stores, the specialty retailer of fabrics and crafts, sold $325 million of seven-year payment-in-kind notes on Oct. 9 that pay 9.75 percent in cash and 10.5 percent if the company pays in added debt, Bloomberg data show.
“A lot of PIK issuers will come when supply levels are running down,” Lurie said. “It’s a little bit less attractive of an investment strategy from the investor side, and it’s kind of enticing them in a different way.”
Offerings of PIK bonds, which allow borrowers to pay interest with extra debt, reached $2.6 billion in the past 30 days, making up more than one-third of this year’s $6.5 billion of deals, Bloomberg data show.
High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
Yields on junk debt fell to 7.047 percent yesterday from 7.066 percent on Oct. 5, and compare with a record low of 6.948 percent reached on Sept. 19, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. Spreads increased 2 basis points to 557 basis points this week.
The world economy will grow 3.3 percent this year, the slowest since the 2009 recession, and 3.6 percent next year, the IMF said Oct. 9, compared with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown, with a one-in-six chance of growth slipping below 2 percent.
Third-quarter per-share earnings at S&P 500 companies may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.
Many companies report third-quarter earnings through Nov. 16, Bloomberg data show.
Issuers planning sales include Brazilian construction firm OAS SA with a sale of seven-year notes and Albea Beauty Solutions with a $650 million issue in dollar- and euro- denominated debt, Bloomberg data show.
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