Bond Sales Topping $3 Trillion Nears 2009 Record: Credit Markets

Corporate bond sales surged to $3.3 trillion this year, challenging the record in 2009, as investors sought higher-yielding alternatives to government securities and companies took advantage of borrowing costs at all-time lows.

General Electric Co. (GE), the biggest maker of power-generation equipment, led issuers this month with a $7 billion bond offering, according to data compiled by Bloomberg. Along with software provider Oracle Corp. (ORCL)’s $5 billion sale, they paced $347 billion of bond issuance in October, a record for the month, and left sales about $116 billion shy of the $3.4 trillion reached by this time three years ago.

Policy makers from the U.S. to Europe and Asia reacted to the deepest financial crisis since the Great Depression by pumping unprecedented amounts of money into the global economy and suppressing interest rates at record lows. That’s pushed yields on the safest government debt close to or below zero percent, prompting money managers to take refuge in company debt as default rates run below their historical average.

“There’s a lot of money out there looking for a home,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London, who recommends investors avoid corporate debt from euro- region countries such as Spain, Italy and Portugal. “Government bonds give you almost nothing, so you’re left with corporate bonds, which give you a little bit more than nothing.”

Investor Demand

Yields on bonds sold by companies around the world fell to a record 2.676 percent on Oct. 15 from 3.981 percent at the end of last year, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index.

Elsewhere in credit markets, the Securities Industry and Financial Markets Association recommended that trading of fixed- income securities in the U.S. resume today as Wall Street recovers from Hurricane Sandy. A benchmark gauge of U.S. corporate credit risk declined for the first time in three trading sessions.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 1.7 basis points to a mid-price of 99.1 basis points at 11:36 a.m. in New York, according to prices compiled by Bloomberg.

Europe Swaps

In London, the Markit iTraxx Europe Index tied to 125 companies with investment-grade ratings was little changed at 128.4 basis points, holding at about a one-week low.

Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

U.S. bond markets opened after being closed since noon Oct. 29 in New York as the so-called superstorm flooded the city’s subways, cut power to millions of East Coast households and businesses and paralyzed Wall Street.

Volume of 971 trades of $1 million or more as of 11:38 a.m. in New York compares with a daily average of 4,319 during the three months before the storm, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.

Sales of corporate bonds through yesterday were 18 percent higher this year than in the same period a year ago and increased 19 percent from 2010, data compiled by Bloomberg show. Companies around the world sold $3.9 trillion of debt in all of 2009, the most ever.

Pacing Gains

Borrowers in the U.S. are pacing this year’s jump in deals, with sales rising 25 percent from the first 10 months of 2011, data compiled by Bloomberg show. They have also raised 12 percent more than in 2009.

Both U.S. investment-grade and junk-rated companies have increased bond sales this year, with issuance rising 22 percent to $918.8 billion and 35 percent to $292.5 billion, respectively.

“Companies have been very proactive in making sure they refinance their maturities in good time,” said Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc in London.

Fairfield, Connecticut-based GE sold $7 billion of bonds on Oct. 1 with maturities from 2015 to 2042. The extra yield investors demand to own its $3 billion of 2.7 percent notes due 2022 has narrowed to 92 basis points from 110 basis points at issuance, according to Trace.

Oracle Bonds

Oracle issued bonds due in 2017 and 2022 on Oct. 18 in its first offerings in more than two years. Spreads on its $2.5 billion of notes due in 2022 narrowed to 64 basis points from 68 when sold, Trace data show.

The largest supplier of database software, based in Redwood City, California, has $2.75 billion of bonds maturing in the next two years, data compiled by Bloomberg show.

Investment-grade corporate debt has returned about 10 percent this year, while junk bonds gained 15.4 percent including reinvested interest, according to Bank of America Merrill Lynch index data.

European bonds are beating those from U.S. issuers. European investment-grade debt returned 11 percent and junk debt 22 percent. That exceeds the 10.3 percent and 13 percent returns in the U.S., the index data show.

Few Alternatives

While the euro-region sovereign crisis continues to damp growth and the U.S. faces a so-called fiscal cliff of spending cuts and tax rises, investors are reassured by the relatively low defaults on corporate debt. The global speculative-grade default rate of 3 percent at the end of the third quarter is lower than the 4.8 percent historical average since 1983, Moody’s Investors Service said in a report on Oct. 8.

Unprecedented low interest rates around the world have left fixed-income investors with fewer alternatives as they search for higher returns. The Federal Reserve has held its benchmark rate close to zero percent for four years and Chairman Ben S. Bernanke said last month he expects no change in this policy through mid-2015.

The European Central Bank in Frankfurt cut its main refinancing rate to a record-low 0.75 percent in July, after starting to lower borrowing costs at the end of 2008.

That’s pushed yields on some of the safest government bonds below zero, while U.S. notes have hovered above this level.

U.S. two-year Treasury rates dropped to 0.143 percent in September 2011, hovered above 0.2 percent for much of this year and are now 0.289 percent. The yield on Germany’s two-year note fell to a record of minus 0.097 percent on Aug. 2, and has since risen to 0.04 percent, while the Netherlands’ bond of that maturity fell to minus 0.035 percent on the same day, before recovering to 0.067 percent.

Way to Go

Issuance of corporate debt still has a way to go to match 2009’s level as a number of borrowers who raised money in that record year stay out of the market. Borrowers including New York-based oil company Hess Corp. (HES) and Grupo Petrotemex SA de CV in Monterrey, Mexico, which issued three years ago and haven’t so far in 2012, will have to add another $640 billion of debt by year-end to match the total $3.93 trillion sold in all of 2009, data compiled by Bloomberg show.

“We expect another 10 billion euros in new corporate bond issuance for the remainder of 2012,” said Suki Mann, head of credit strategy at Societe Generale SA in London. “Total bond issuance at the end of this year will not be anywhere near 2009 levels, but it’s an excellent year nevertheless.”

Companies from the Asia-Pacific region have already sold a record amount of debt this year, raising $843 billion from bond sales, 12 percent more than for all of 2011, according to data compiled by Bloomberg. Shanghai Pudong Development Bank (600000) and China Minsheng Banking Corp. Ltd. are among the biggest issuers.

“We are certainly getting close to 2009 issuance levels with recent good momentum in the primary market,” said Simon Ballard, senior credit strategist at National Australia Bank Ltd. in London. “We have companies opportunistically tapping the credit markets at levels that have not been available to them for a long time, if at all.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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