Bond Gains Accelerate in Busiest July Since 2009: Credit Markets

Bond Gains Accelerate in Busiest July Since 2009
Borrowers from Unilever NV to International Business Machines Corp. are obtaining record-low interest rates even as economists surveyed by Bloomberg forecast growth of 2.18 percent this year following 2.93 percent in 2011. Photographer: Scott Eells/Bloomberg

Returns this month on corporate bonds from the U.S. to Europe and Asia are exceeding those in the entire second quarter and offerings are poised for the busiest July in three years as investors show growing confidence in company finances.

Gains of 2.23 percent in July on debt from the neediest to the most creditworthy borrowers are the most since 2.38 percent in January, Bank of America Merrill Lynch index data show. A $7.5 billion offering from Anheuser-Busch InBev NV, the world’s largest brewer, led $277.8 billion of issuance since the end of June as yields on investment-grade debt touched unprecedented lows.

Borrowers from Unilever NV to International Business Machines Corp. are obtaining record-low interest rates even as economists surveyed by Bloomberg forecast growth of 2.18 percent this year following 2.93 percent in 2011. Investors are seeking a haven in company debentures with a speculative-grade default rate of 2.7 percent as of the second quarter compared with a historic average of 4.8 percent since 1983, according to Moody’s Investors Service.

Corporates “have been the most reliable and dependable asset class in terms of relative and absolute performance,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said yesterday in a telephone interview. Credit markets are discounting “the outlook, which is not as dim as would be presupposed by some of the headlines and the fluctuations in the equities market,” he said.

Debt Refinancings

Borrowers are using the majority of proceeds from bond issues to refinance debt, according to data from Moody’s. About 63 percent of investment-grade offerings and 73 percent of high-yield issues and bank loans involved refinancing in the second quarter, after excluding sales listed for general corporate purposes.

“The corporate bond market right now is not particularly worried about the nearness of a recession and, on the high yield front, there is still a benign outlook for defaults,” John Lonski, chief economist at Moody’s Capital Markets Group in New York, said in a telephone interview.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 0.3 basis points to a mid-price of 106.6 basis points as of 11:09 a.m. in New York, according to prices compiled by Bloomberg.

Rate Swaps

The measure typically rises as investor confidence deteriorates and falls 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 U.S. two-year interest-rate swap spread, a measure of bond market stress, rose from the lowest level in almost 14 months, increasing 0.3 basis point to 19.6 basis points as of 11:09 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Bonds of Itau Unibanco Holding SA are the most actively traded dollar-denominated corporate securities by dealers today, with 118 trades of $1 million or more as of 11:17 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company sold $1.375 billion of 5.5 percent, 10-year notes yesterday.

Forecast Cut

The International Monetary Fund cut its 2013 global growth forecast as Europe’s debt crisis prolongs Spain’s recession and slows expansions in emerging markets from China to India. Growth worldwide will be 3.9 percent next year, less than the 4.1 percent estimate in April, the fund predicted on July 16 in an update of its World Economic Outlook.

Corporate bond returns worldwide this month of 2.23 percent on the Bank of America Merrill Lynch index, following 1.54 percent in April through June, are accelerating as investors see the debt as an alternative to traditional havens. Government securities returned 1 percent in July.

The ratio of cash to total assets for companies in the Standard & Poor’s 500 Index stands at about 9.9 percent, down from a recent peak of 10.2 percent in September, data compiled by Bloomberg show. Five years ago, the ratio was 5.7 percent.

European Central Bank President Mario Draghi met with U.S. Treasury Secretary Timothy Geithner in Frankfurt yesterday after leaders in Berlin, Paris and Rome backed him by saying they will do what’s needed to protect the 17-nation euro.

Bank Bonds

The Federal Reserve will start a two-day meeting today. Fed Chairman Ben S. Bernanke told the Senate Banking Committee in Washington on July 17 that Europe’s financial woes are creating “spillover effects” in the rest of the world.

Industrial bonds are headed for their best month in three years, gaining 2.5 percent following 0.04 percent in June, Bank of America Merrill Lynch index data show. The debt returned 3.3 percent in July 2009.

Bank bonds have returned 1.82 percent this month, following 0.86 percent in June, index data show. That brings gains for the year to 8.39 percent, poised for the best year since a 13.8 percent rise in 2009.

Investment-grade bonds have returned 2.31 percent this month, beating high-yield’s 1.82 percent, Bank of America Merrill Lynch index data show. In June, investment grade’s 0.28 percent return trailed junk’s 2.06 percent.

Corporate bond offerings worldwide this month of $277.8 billion compare with $264.3 billion in June and $222.1 billion in July 2011, according to data compiled by Bloomberg. Sales reached $286.4 billion in July 2009.


In the U.S., sales of $94.4 billion mark the busiest July on record. Offerings in Europe of 14.4 billion euros ($17.7 billion) are headed for the busiest July since 2001, when 22.3 billion euro was raised, Bloomberg data show.

The offering from Leuven, Belgium-based Anheuser-Busch will help finance its $20.1 billion acquisition of a remaining 50 percent stake in Grupo Modelo SAB de CV. The offering from the maker of Budweiser and Stella Artois was the largest since United Technologies Corp. sold $9.8 billion of bonds in a six-part offering in May, Bloomberg data show.

Investment-grade corporate yields fell to an unprecedented 3.007 percent on July 20 on the Bank of America Merrill Lynch Global Broad Market Corporate index, before climbing to 3.014 percent as of yesterday.

Companies received record-low coupons for three-, five-, 10- and 30-year dollar-denominated bonds this month, Bloomberg data show.

Spreads Tighten

Unilever, the world’s second-largest consumer-products company, sold $450 million of three-year notes and Dallas-based chipmaker Texas Instruments Inc. issued $750 million due in 2015, both at a record-low 0.45 percent for the maturity. London-based Unilever also issued $550 million of five-year debt at 0.85 percent.

IBM, the world’s largest computer-services provider, sold $1 billion of 10-year securities on July 25 at 1.875 percent, Bloomberg data show. Bristol-Myers Squibb Co. issued $500 million of 30-year debentures the next day at 3.25 percent.

Borrowers drawn to low rates “is exactly what policy makers want to achieve,” Malvey said. “They want to have issuers in all parts of the world, including financial services, to extend the maturity of their liability streams so they’re not as dependent on overnight financing.”

The extra yield investors demand to hold corporate bonds of all ratings globally has decreased 18 basis points this month to 280 basis points, the lowest since May 8, Bank of America Merrill Lynch index data show. Spreads have tightened from 351 at year-end.

“Not every pocket is as weak as suggested by Europe,” Malvey said. “Corporate market investors seem relatively content about the credit quality of portfolios and the outlook for decent performance moving forward.”

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