Sales of corporate bonds in the U.S. were the least in five weeks as Federal Reserve Chair Janet Yellen signaled interest rates may rise sooner than investors expected.
Exxon Mobil Corp. (XOM), which commands top AAA credit ratings from Moody’s Investors Service and Standard & Poor’s, and units of El Segundo, California-based DirecTV led offerings of $21.5 billion, the least since $20.8 billion in the five days ended Feb. 14, according to data compiled by Bloomberg. Issuance is slowing after the second-busiest week on record, with $64.4 billion in the period ended March 7.
Borrowers held back as Yellen told reporters this week that the interval between the end of quantitative easing and the first increase in the fed funds rate might be “around six months.” The remark came as a “shock” to most investors, who were expecting a longer pause before rates may rise, according to Edward Marrinan at RBS Securities, and helped push yields on corporate debt to their highest in more than a month.
“The cost of borrowing has increased virtually overnight,” Marrinan, a Stamford, Connecticut-based macro credit strategist, said in a telephone interview. “This move provides a good excuse for many prospective issuers to wait for the market to settle down before bringing their deals.”
Yields increased to 3.88 percent yesterday, the highest since Feb. 12, from 3.8 percent on March 14, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index.
The extra yield investors demand to own corporate bonds rather than government debentures narrowed to 178 basis points from 184 basis points on March 14, the index data show. A basis point is 0.01 percentage point.
Offerings fell to $2 billion on March 19, the day Yellen made the remarks during her first press conference as chair of the central bank after leading the Federal Open Market Committee policy-setting meeting. Sales were down 73 percent from this year’s daily average of $7.5 billion, Bloomberg data show.
“A lot of companies pre-funded when they thought rates were on the low side,” Liane Rosenberg, a New York-based fixed-income fund manager at EULAV Asset Management, which manages the Value Line Funds, said in a telephone interview. “This contraction of issuance may not be a one-week thing.”
Exxon sold $5.5 billion of notes in five parts, its biggest offering on record, as it ended a more than two-decade hiatus from the U.S. bond market, Bloomberg data show. The offering included $1 billion of 10-year, 3.176 percent coupon bonds that priced to yield 48 basis points more than similar-maturity Treasuries and $1.75 billion of five-year debt with a 1.819 percent coupon and a 25 basis-point spread.
DirecTV (DTV) Holdings LLC and DirecTV Financing Co. issued $1.25 billion of 4.45 percent notes due April 2024 with a relative yield of 180 basis points, Bloomberg data show.
Sales of investment-grade debentures reached about $17.7 billion, compared with $34.7 billion last week and a weekly average of $22.6 billion over the past 12 months, Bloomberg data show. Offerings of speculative-grade bonds reached $3.8 billion, compared with $6.2 billion last week and a weekly average of $6.7 billion over the past year.
High-risk, high-yield bonds are rated below Baa3 by Moody’s and lower than BBB- at S&P.