BofA to Goldman Lead Tsunami of Bank Bond Sales: Credit Markets

Banks around the world are stepping up bond sales, with lenders from Bank of America Corp. to Goldman Sachs Group Inc. (GS) accounting for the biggest share of dollar-denominated investment-grade deals in two years.

Offerings by lenders from the U.S. to Europe and Asia rose 62 percent to $26.4 billion last week from $16.3 billion in the period ended July 12, according to data compiled by Bloomberg. Almost 60 percent of high-grade sales in the U.S. this month are from banks, the biggest proportion in two years.

Banks in the U.S. are attracting bond buyers with second-quarter earnings beating analyst estimates by 8.7 percent, the widest margin of any industry. The yield on the Bloomberg U.S. Corporate Bond Index Financials has declined to 2.84 percent from an 11-month high of 3.18 percent reached June 25.

“The reporting season is done and dusted and interest-rate volatility has stabilized,” said Norval Loftus, chief investment officer at Allegra Investment Management (U.K.) Ltd. in London, an asset manager specializing in bond investments for large family offices. “So it’s a good two-part combination for an issuance window and for banks to increase their issues.”

The Bloomberg financial index has gained 1.3 percent this month versus a 1.15 percent return for industrial borrowers. That’s pared this year’s loss for bonds of borrowers from Citigroup Inc. to JPMorgan Chase & Co. to 0.47 percent, following a 4 percent loss in May and June.

Photographer: Davis Turner/Bloomberg

The Bank of America Corp. headquarters stands in Charlotte, North Carolina. Bank of America sold $2 billion of 4.1 percent debt due July 2023 on July 18 at a relative yield of 157 basis points, Bloomberg data show. Close

The Bank of America Corp. headquarters stands in Charlotte, North Carolina. Bank of... Read More

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Photographer: Davis Turner/Bloomberg

The Bank of America Corp. headquarters stands in Charlotte, North Carolina. Bank of America sold $2 billion of 4.1 percent debt due July 2023 on July 18 at a relative yield of 157 basis points, Bloomberg data show.

Improved Sentiment

Investors are regaining their appetite for bonds after Federal Reserve Chairman Ben S. Bernanke pledged last week to “maintain a high degree of monetary accommodation” in deciding to curtail the central bank’s unprecedented purchases of fixed-income securities that have bolstered markets.

“Sentiment has improved over the past couple of weeks” as some of the economic concerns of May and June were clarified, said Richard Ford, the London-based head of European fixed income at Morgan Stanley Investment Management, which manages $347 billion of assets globally.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. declined for a fourth day, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.8 basis point to a mid-price of 71.8 basis points as of 11:43 a.m. in New York, according to prices compiled by Bloomberg.

Rate Swaps

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps 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 contract protecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.9 basis point to 18.25 basis points as of 11:43 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Bonds of Bank of America are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 5.9 percent of the volume of dealer trades of $1 million or more as of 11:44 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Goldman’s bonds were the most actively traded last week, accounting for 3.2 percent of the volume of dealer trades, Trace data show.

Goldman’s Offering

The $2.5 billion offering of five-year bonds on July 16 from the Wall Street bank that generates most of its revenue from trading led $66.9 billion of corporate-bond sales worldwide last week, an 11.5 percent increase from the $60.1 billion sold in the period ended July 12, Bloomberg data show.

Goldman’s 2.9 percent debentures priced to yield 155 basis points more than similar-maturity Treasuries, its narrowest spread on five-year securities since October 2007, Bloomberg data show. The securities climbed 0.87 cent from the issue price to 100.78 cents on the dollar to yield 2.73 percent as of the end of last week, according to Trace data.

Goldman, the fifth-biggest U.S. bank by assets, reported profits of $3.70 a share, beating estimates of $2.89, Bloomberg data show. Investment-banking revenue jumped 29 percent to $1.55 billion in the quarter, including $695 million from debt underwriting and $371 million for equity offerings, according to a July 16 statement.

Forecasts Exceeded

“Goldman benefited from resilient revenues in both investment banking and its institutional client services businesses,” Kathleen Shanley, an analyst at debt researcher Gimme Credit LLC, wrote in an e-mail. “It never hurts for an investment bank to launch a bond offering right after releasing an upbeat earnings result.”

The 25 financial firms in the S&P 500 Index that have reported second-quarter results posted earnings totaling $31.6 billion, exceeding analyst estimates of $29.1 billion, Bloomberg data show. Fifty-six financial companies in the index have yet to report.

Charlotte, North Carolina-based Bank of America sold $2 billion of 4.1 percent debt due July 2023 on July 18 at a relative yield of 157 basis points, Bloomberg data show. Those bonds rose 1.3 cents from the issue price to 101.22 cents on the dollar to yield 3.95 percent, according to Trace.

Banks have borrowed $49.7 billion this month, compared with $30.7 billion in June, the least since $30.4 billion was sold in December 2001, Bloomberg data show.

‘Preset Course’

In the U.S., bank bond offerings of $29.2 billion accounted for 59.1 percent of investment-grade sales, the biggest share of issuance since 63.2 percent in July 2011, Bloomberg data show. The proportion increased from 7.3 percent last month.

Bernanke triggered a bond selloff on May 22 when he said the central bank may cut the pace of $85 billion of monthly purchases of Treasuries and mortgage bonds if economic conditions warrant. Yields on Bloomberg’s dollar-denominated, high-grade financial debt index soared from a record low 2.21 percent on April 30.

The Fed’s asset purchases aren’t on a “preset course,” Bernanke said July 17. “We’re going to be responding to the data,” the Fed chairman said in testimony before the House Financial Services Committee.

“Bernanke has signaled he won’t imminently slow stimulus, so sentiment has genuinely improved,” Allegra’s Loftus said. “You didn’t know what might happen from one day to the next last month in terms of tape bombs.”

To contact the reporters on this story: Katie Linsell in Madrid at klinsell@bloomberg.net; Sarika Gangar in New York at sgangar@bloomberg.net

To contact the editors responsible for this story Shelley Smith at ssmith118@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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