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Yields Falling to ’04 Levels Spark Busiest July: Credit Markets

Companies took advantage of lower borrowing costs
A Big Mac burger. Photographer: Jason Alden/Bloomberg

U.S. corporate bond sales soared 31 percent this month, the busiest July on record, as yields fell to the lowest in more than six years on growing investor confidence in the economic recovery.

Issuance of $85.7 billion exceeded the previous high for the month of $71.1 billion set last year, according to data compiled by Bloomberg. The cost of borrowing fell to 5.04 percent, the lowest since April 2004, and down from the 2010 high of 5.75 percent on Jan. 4, according to Bank of America Merrill Lynch’s U.S. Corporate & High Yield index. That decline would save issuers about $7.1 million of interest per $1 billion of bonds.

Companies took advantage of lower borrowing costs as more than 77 percent of those in the Standard & Poor’s 500 Index that reported earnings exceeded analyst estimates and European bank and regulator stress tests provided a better view into balance sheets of the region’s lenders. McDonald’s Corp., the world’s largest restaurant chain, sold 10-year debt at the lowest rates of any borrower in the U.S. bond market in at least 15 years.

“It’s an extraordinary financing environment,” said Justin D’Ercole, head of investment-grade syndicate for the Americas at Barclays Capital in New York. “When you juxtapose this opportunity with how the world felt at the end of April and early May, I think treasurers all the way up to CEOs see a compelling opportunity to put more cash onto the balance sheet.”

‘Makings to be Massive’

August issuance may be similar to July’s and “has the makings to be massive,” D’Ercole said in a telephone interview. Since 1999, July corporate bond sales have averaged $52.7 billion, less than any other month, Bloomberg data show. August is typically the second-slowest month with $57.1 billion of sales on average, while March is the busiest, with $96.7 billion.

U.S. corporate bond sales in July compare with $65.7 billion in June. Global issuance of $223.9 billion this month trails June’s total of $226.3 billion, Bloomberg data show.

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds worldwide rather than government debt fell to the lowest since May 18. The cost of protecting company debt in the U.S. from default is poised to decline for July, following three monthly increases. Leveraged loan prices rose for a seventh day.

Global company bond spreads fell 1 basis point to 176 basis points, or 1.76 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. The gap has dropped 20 basis points since the end of June and is unchanged from Dec. 31. Yields fell to 3.782 percent, compared with 3.959 percent on June 30.

Energy Bonds

The bonds returned 1.045 percent this month, after gaining 1.32 percent in June, according to the index. Government debt returned 0.31 percent, following a 0.83 percent gain in the prior month. For the year, corporate bonds have returned 6.1 percent, versus 4.1 percent for government debt.

Energy bonds were the best performing in the global index with a 1.97 percent return in July as BP Plc capped its leaking well in the Gulf of Mexico, Bank of America Merrill Lynch index data show. Bonds from London-based BP gained 9.05 percent this month, index data show.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, rose 1 basis point to 104.92 basis points as of 11:45 a.m. in New York, according to Markit Group Ltd. The index is down from 122.66 on June 30.

European iTraxx

In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings climbed 0.47 to 105.16. That index has declined from 129.45 at the end of June.

Both indexes typically rise as investor confidence deteriorates and fall as it improves. 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 S&P/LSTA US Leveraged Loan 100 Index climbed 0.15 cent yesterday to 89.73 cents on the dollar, the highest since May 19. Loans have returned 2.25 percent in July and 3.82 percent this year, according to the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans.

Noble Group Ltd., the commodities supplier backed by China’s sovereign wealth fund, may sell $750 million of 5-year and 10-year bonds denominated in U.S. dollars as soon as today, a person familiar with the transaction said.

AMD, JPMorgan Chase

The Hong Kong-based company may price the $500 million of five-year notes to yield 330 basis points more than similar-maturity Treasuries, said the person, who declined to be identified because the marketing is private. A $250 million portion of 10-year notes may be priced at a 375 basis-point spread, the person said.

Corporate bond issuance rose as companies including Sunnyvale, California-based chipmaker Advanced Micro Devices Inc. and JPMorgan Chase & Co., the second-biggest U.S. bank by assets, reported earnings that exceeded analyst estimates and 84 of 91 European lenders passed stress tests last week.

“The market was prepared for an oil spill that was not going to be capped, a stress test that would highlight significant capital shortfall in Europe, and an earnings season with no top-line revenue growth,” said D’Ercole of Barclays Capital. “None of those scenarios materialized so the market has had to reprice across the capital structure.”

Lowest Interest

McDonald’s joined Dallas-based Kimberly-Clark Corp., the maker of Huggies and Kleenex tissues, and Duke Energy Indiana Inc. in paying the lowest interest on 10-year debt since 1995 through issues this month, Bank of America Merrill Lynch data show.

“If you have any kind of need to issue paper, it’s a good time,” said Dan Sheppard, a New York-based director in fixed-income at Deutsche Bank AG’s Private Wealth Management unit, where he helps oversee $12 billion.

McDonald’s $750 million offering included $450 million of 10-year notes with a 3.5 percent coupon, the lowest since 1995 for any issuer, including New Brunswick, New Jersey-based Johnson & Johnson, the world’s largest maker of health products, with a top AAA rating from S&P. The rating firm is expected to assign an A rating, five steps lower, to the McDonald’s notes.

Companies such as McDonald’s in the 30-member Dow Jones Industrial Average Index “are names that will trade the tightest so they’re taking advantage of absolute low rates and tight credit spreads right now,” said Dan Mead, a managing director of U.S. investment-grade debt syndicate at Bank of America Corp. The bank helped manage the sale for the Oak Brook, Illinois-based fast-food chain.

Fed Fund Futures

Futures show a 7.8 percent chance the Federal Reserve will raise its target rate for overnight loans between banks by at least a quarter-percentage point by December, down from 17.2 percent a month ago. The rate is currently zero to 0.25 percent.

“Investors think the Fed’s going to be on hold for a good long time and they’re not really worried about rates going up in any true dramatic fashion as they were only a few months ago,” Deutsche Bank’s Sheppard said.

Redwood City, California-based Oracle Corp., the world’s second-largest software maker, led non-financial corporate bond sales in the U.S. this month, issuing $3.25 billion of 10- and 30-year debt on July 12. Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, led financial issuance, offering $5 billion of notes.

Investment Grade

Investment-grade sales in the U.S. reached $69.05 billion in July, a 19 percent jump from June, and the most since March, when volume was $100.2 billion, Bloomberg data show. Junk sales are $16.7 billion month-to-date, double that of June, and the most since April, the data show. High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.

“Credit looks like it offers a lot of value,” Charles Himmelberg, chief credit strategist at Goldman Sachs Group Inc. in New York, said on a conference call with clients. “There’s a lot of appetite for those new issues that have come to the market recently. And I suspect there’ll be a lot of new issue debt coming in the next few months which will meet with quite a bit of oversubscription and quite a bit tighter spreads.”

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