Sales of U.S. corporate bonds plummeted 79 percent this week as borrowers stood on the sidelines with investment-grade buyers poised for their first monthly losses since March.
A $1.1 billion offering of perpetual preferred shares by JPMorgan Chase & Co., the largest U.S. lender by assets, and a similarly sized issue of 30-year bonds by Illinois Tool Works Inc. led $7.5 billion of deals, according to data compiled by Bloomberg. That compares with $35.5 billion last week and $7.1 billion in the corresponding period last year.
“It’s a dramatic slowdown versus the last couple of weeks,” Simon Mayes, head of the financial institutions group syndicate at BNP Paribas SA in New York, said in a telephone interview. “It’s been a much busier August than previous Augusts, but it was very much concentrated in the first couple of weeks.”
Offerings slowed with the Bank of America Merrill Lynch U.S. Corporate Master losing 0.23 percent in August, the first decline since a 0.59 percent drop in March. Bond buyers are also waiting to see if Federal Reserve policy makers plan another round of economic stimulus through bond buying, a move that would likely lower Treasury rates and push investors in search of higher yields to corporates.
Yields on bonds from the most creditworthy to riskiest corporate borrowers reached 3.881 percent yesterday, from 3.995 percent on Aug. 17, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Master index. The extra yield investors demand to own the bonds rather than government debentures was unchanged at 264 basis points.
Investment-grade sales of at least $5.6 billion this week compare with $24 billion in the five days ended Aug. 17 and a 2012 weekly average of $20.8 billion, Bloomberg data show.
Yields on the debt decreased to 3.042 percent yesterday, from 3.157 percent on Aug. 17, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Spreads decreased 1 basis point to 184 basis points.
Illinois Tool Works, the Glenview, Illinois-based maker of Hobart food mixers and Duo-Fast nail guns, sold 3.9 percent securities maturing in September 2042 at a yield of 105 basis points more than similar-maturity Treasuries, Bloomberg data show. Proceeds will be used to repay debt incurred under a commercial-paper program and for general corporate purposes.
“It’s a continuation of opportunistic issuance,” Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview. “We see an ongoing healthy appetite on the part of investors to own corporate bonds, particularly higher quality exposures.”
Sales from high-yield borrowers, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, fell to $1.9 billion this week compared with $11.4 billion in the period ended Aug. 17 and a 2012 weekly average of $6.1 billion, Bloomberg data show.
Yields on junk debt decreased to 7.318 percent yesterday from 7.411 percent on Aug. 17, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. Spreads were unchanged at 589 basis points.
JPMorgan issued $25 shares, callable after five years, to yield 5.5 percent, Bloomberg data show. The offering, rated the highest level of speculative grade at Ba1 by Moody’s, was earlier marketed at $500 million. The sales followed an offering of $2.5 billion of 2 percent, five-year notes on Aug. 13.
Overall sales total $90.1 billion this month, making it the third-busiest August on record, behind $104.3 billion in 2010 and $97.9 billion in 2007, Bloomberg data show.
Minutes of the Fed’s July 31-Aug. 1 meeting showed many policy makers said a third round of quantitative easing, or QE3, would probably be needed soon unless the economy shows signs of a durable pickup. Many participants said a new large-scale asset-purchase program “could provide additional support for the economic recovery,” the record showed.
“All indications are pointing in the direction of QE and further accommodation are highly likely,” Marrinan said. “That could lead to lower risk-free rates and a re-invigorated appetite for risk.”
Issuers planning bond sales include Wells Fargo & Co., the largest U.S. home lender, with a $250 million five-year issue and Asia Cement Corp., the seller of Skyscraper brand cement, with a $300 million sale of five-year convertible notes, Bloomberg data show.
“I think there will be a lot of people taking a breather next week in preparation for a very busy September,” Mayes said.