Longer-Dated Bond Sales Soar Amid Best Returns: Credit Markets

Investors are buying longer-maturity corporate bonds at the fastest pace in more than three months, speculating that declining inflation expectations will keep the Federal Reserve from raising interest rates.

Charles Schwab Corp. and Bancolombia SA sold $1.2 billion of notes due in 2020 yesterday, according to data compiled by Bloomberg. That followed $14.6 billion of issuance last week of debt due in 10 years or more, the most since the period ended March 26. Investment-grade bonds due in 10 to 15 years returned 1.22 percent this month, the best-performing maturity range, Bank of America Merrill Lynch index data show.

Treasury Inflation Protected Securities have lost 1.25 percent this month, the worst performance for the debt since December, signaling investors are less concerned that quickening inflation will erode the value of their bonds. Futures show a 13.6 percent chance the Fed will raise its target rate for overnight loans between banks by at least a quarter-percentage point by December, down from 21.4 percent a month ago.

“You’re getting more bang for your buck” in longer-maturity bonds, said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $59 billion.

Treasuries due in 10 years yield 2.38 percentage points more than U.S. government debt maturing in two years, compared with a 2.7 percentage-point gap at the end of 2009, Bloomberg data show. The so-called yield curve has flattened as expectations for faster inflation decline, said John Milne, chief executive officer of JKMilne Asset Management, who oversees about $1.8 billion in Fort Myers, Florida.

‘Less of a Fear’

“We have less of a fear of the long end of the market,” Milne said.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt remained at the lowest since May. Corporate bond spreads were at 187 basis points, or 1.87 percentage points, unchanged from July 16, which was the lowest since May 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The gap was 142 on April 21 before expanding to as much as 201 on June 11. Yields rose to 3.87 percent from 3.856 percent at the end of last week.

The cost of protecting company debt in the U.S. fell, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, declining 0.15 basis point to a mid-price of 112.83 basis points as of 12:15 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings dropped 0.5 basis point to 119.65 basis points.

Bondholder Protection

Both indexes typically fall as investor confidence improves and rise 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 swap protecting $10 million of bonds and loans.

Returns this month on investment-grade bonds due in 10 to 15 years compare with a gain of 0.53 percent for securities due in 1 to 3 years, Bank of America Merrill Lynch index data show.

Schwab’s $600 million of 10-year, 4.45 percent senior notes priced to yield 150 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

The San Francisco-based company boosted the offering from $500 million. Schwab last sold debt in June 2009, issuing $750 million of 5-year, 4.95 percent notes that priced to yield 250 basis points more than benchmarks, Bloomberg data show.

Calpine Offering

Bancolombia, Colombia’s largest lender, sold $620 million of subordinated bonds after boosting the size of the offering by $20 million. The 10-year notes pay a spread of 337.5 basis points, Bloomberg data show.

Calpine Corp. plans to sell $750 million of senior secured notes due in 2020, the Houston-based power producer said in a statement distributed by Business Wire. The debt may be sold as soon as today, said a person familiar with the transaction who declined to be identified because terms aren’t set. Proceeds will be used to repay part of a term loan, the company said.

While Fed policy makers may leave the benchmark interest rate near zero to help invigorate the economy, the cost of living in the U.S., excluding food and energy prices, climbed in June more than forecast. Prices may fall as yields on investment-grade corporate bonds due in 10 to 15 years hover near the lowest since 2005, Brady said.

The yield rose to 5.421 percent yesterday, from 5.399 percent on July 16, the lowest since September 2005, Bank of America Merrill Lynch index data show.

“Yields can’t go lower forever,” Thornburg’s Brady said.

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