Corporate bond issuance in the U.S. reached $24.3 billion today in what was the busiest session for the year as the market powers back to life after the sleepiest August since 2008.
Ford Motor Co. (F), the second-largest U.S. automaker, and home improvement chain Lowe’s Cos. (LOW) are among companies that sold debt, beating the $23.45 billion issued on March 5 and more than triple the average daily volume of $6.9 billion during the past 12 months, according to data compiled by Bloomberg.
“The latest upturn in bond yields serves as a warning to companies: if you want to minimize fixed-rate borrowing costs, bring forward any planned debt offerings,” John Lonski, Moody’s Capital Markets Research Group’s chief economist, said in a telephone interview.
Yields on U.S. company bonds have risen 0.05 percentage point in the past two days. Ten-year Treasuries posted their biggest one-day increase yesterday since July 30. Federal Reserve Chair Janet Yellen told central bankers last month that U.S. policy makers may raise interest rates sooner than investors anticipate amid labor-market gains.
“Recent economic news in the U.S. at least suggests that in all likelihood bond yields will be climbing higher and also reinforces expectations of a Fed Funds rate hike by the end of June 2015,” Lonski said. Investors are pricing in a 43.2 percent chance that rates will rise to at least 0.25 percent by March 2015, based on Fed Funds futures.
Ford, through its financing unit, issued $2.4 billion in a three-part sale that included $1 billion of 1.68 percent, three-year notes to yield 72 basis points more than similar-maturity Treasuries, Bloomberg data show.
Lowe’s issued $1.25 billion that included $450 million of 3.125 percent 10-year bonds to yield 82 basis points more than Treasuries.
“These borrowed funds will be used to repurchase shares in order to jack up rent-adjusted leverage towards management’s goal of 2.25” times earnings, Carol Levenson, director of research at Gimme Credit LLC wrote in a note today to clients in reference to Lowe’s debt sale.
At least 18 companies announced bond deals today, Bloomberg data show.
Justin D’Ercole, head of U.S. investment-grade syndicate at Barclays Plc in New York, said that investors are expected to have less cash from maturing bonds to reinvest in the second half.
“In the first half of the year maturing bonds meant that investors received $320 billion in cash to reinvest. In the second, the cash being returned to investors sums to $189 billion,” D’Ercole wrote in an e-mailed statement.
While August is typically slow as investors and bankers take vacations, last month was particularly dead. Sales in the U.S. of about $56.3 billion were down from $91.3 billion in July and mark the least amount raised in an August since 2008, Bloomberg data show.
Issuance may still be curbed should there be a rise in geopolitical tension, which led investors to pull out a record $7.1 billion from U.S. junk bonds early last month.
“There is a greater degree of uncertainty this week due to headlines around Ukraine”, the European Central Bank meeting tomorrow, and then payrolls on Friday, which is creating greater price sensitivity, D’Ercole wrote. “That being said, for those borrowers willing to pay a concession that’s acceptable to the market, we are seeing solid investor interest.”
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