Occidental Petroleum Corp. and Bank of America Corp. led $15.5 billion of corporate bond sales in the U.S. this week, pushing monthly issuance past the December 2009 total amid rising confidence in the economic recovery.
Occidental Petroleum, the biggest onshore crude producer in the continental U.S., sold $2.6 billion of notes in the largest offering in more than five weeks. Charlotte, North Carolina-based Bank of America issued $1.5 billion of fixed-rate debt in its first such sale since August.
Corporate bond issuance has climbed to $62.6 billion this month, surpassing the $58.1 billion sold during all of December 2009, as relative yields on investment-grade company debt contract to the tightest since May and junk-bond spreads narrow to levels last seen more than three years ago. Investors are wagering the U.S. economy’s recovery will accelerate even as European countries struggle to manage their debts, said James Barnes, a money manager at National Penn Investors Trust Co.
“What’s winning right now is the possibility that this is the economic expansion we’ve all been waiting for,” said Barnes, who helps oversee $1 billion in fixed-income assets in Wyomissing, Pennsylvania. “The market saw what was going on overseas and they pushed it to the side.”
The extra yield investors demand to own high-yield, high-risk, or junk, bonds were unchanged at 554 basis points this week after trading as low as 540, the narrowest since Nov. 16, 2007, according to the Bank of America Merrill Lynch High Yield Master II index. Absolute yields on the debt fell 2 basis points to 7.91 percent, the index data show.
High-yield bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s. A basis point is 0.01 percentage point.
Moody’s cut Ireland’s credit rating five levels to Baa1, and yesterday placed Greece’s Ba1 bond ratings on review for a possible downgrade. Spain sold 2.4 billion euros ($3.2 billion) of bonds, less than its maximum target, as its borrowing costs surged after Moody’s said it was weighing whether to cut its Aa1 rating on the country.
Spreads on investment-grade corporate bonds shrank 2 basis points to 169 basis points, according to the Bank of America Merrill Lynch U.S. Corporate Master Index. The bonds yield 4.12 percent, 3 basis points lower than last week, the index data show.
This week’s sales are down from a 2010 average of $22.5 billion and last week’s $30.3 billion, Bloomberg data show.
“With yields going up on Treasuries, that might have put people off a bit because all-in yields aren’t as attractive as they used to be earlier this year,” said Mirko Mikelic, a senior money manager who helps oversee $14 billion of fixed income assets at Fifth Third Asset Management in Grand Rapids, Michigan. “Everybody expects yields to rise, but it has happened so quickly already.”
The 10-year Treasury notes, the market bellwether, climbed to a yield of as much as 3.56 percent on Dec. 16, the highest since May, after the Federal Reserve said economic recovery is continuing and maintained its $600 billion of debt purchases. That’s 99 basis points more than the yield on Nov. 3, the day the Fed announced its plan, and 6 basis points less than a year ago.
Speculative-grade borrowers from Swift Transportation Co. to Syniverse Holdings Inc. sold $4.18 billion of high-yield debt this week, Bloomberg data show.
Occidental Petroleum Sale
Occidental Petroleum, based in Los Angeles, sold $600 million of three-year notes at a yield 50 basis points more than similar-maturity Treasuries, $700 million of five-year debt at a 60 basis-point spread and $1.3 billion of 10-year bonds at 80 basis points over benchmarks on Dec. 13, Bloomberg data show. It was the biggest sale since Coca-Cola Co. issued $4.5 billion of securities on Nov. 4.
Bank of America, the biggest U.S. lender, issued 10-year notes in its first offering selling $1.5 billion of five-year debt on Aug. 17, before facing demands from mortgage investors to repurchase almost $13 billion of loans that may have failed to document key data such as income and home values.
Borrowers are rushing to issue debt as they take advantage of low yields before interest rates rise further, said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel, Nicolaus & Co., which has $90 billion in assets.
“We’re still in the world of cheap money,” Morganlander said. “The move in Treasury yields from 2.5 percent to 3.5 percent is incentivizing corporate decision makers to accelerate their issuance after the New Year.”