Corporate bond sales in the U.S. have all but halted after the Federal Reserve said this week that it’s prepared to taper its stimulus program later this year, prompting the biggest increase in investment-grade yields in 21 months.
Solar Star Inc. was the only borrower said to be marketing bonds yesterday, with a $1 billion issue, following $330 million in offerings June 19. The slowdown is trimming a daily average of $7 billion as of June 18 that put 2013 on pace for a record year, according to data compiled by Bloomberg.
Offerings dwindled in anticipation of the Federal Open Market Committee’s meeting this week, at which policy makers declared “diminished” downside risks to the economy and stated they will probably begin tapering $85 billion in monthly bond buying later in 2013, provided the economy performs in line with Fed projections. The statements put fixed-income investors “on notice” for a potential rise in interest rates, said Anthony Valeri at LPL Financial Corp.
“It’s a really illiquid environment right now and nobody wants to step in,” Valeri, a San Diego-based market strategist, said in a telephone interview. “There’s uncertainty over the dollar amount of tapering, and the fact that the Fed was bullish opens up the possibility of a late 2014 rate hike,” he said, referring to the Fed’s benchmark interest rate, which has been kept between zero and 0.25 percent since December 2008.
Yields on investment-grade debt rose 11 basis points to 3.22 percent June 19, the biggest one-day climb since an identical increase on Sept. 23, 2011, according to the Bank of America Merrill Lynch U.S. Corporate Index. Borrowing costs are the highest since July 9, 2012, when they reached 3.23 percent.
The extra yield investors demand to hold the debt instead of similar-maturity Treasuries decreased 1 basis point June 19 to 157 basis points, down from this year’s high of 159 basis points on June 13, index figures show.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” Fed Chairman Ben S. Bernanke said in a press conference in Washington following the FOMC’s June 18-19 meeting. If later reports meet the Fed’s expectations, “we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
Offerings of $785.2 billion this year exceed the $675.7 billion issued in the similar period in 2012, when issuance reached an unprecedented $1.48 trillion, Bloomberg data show. Sales are decelerating with the $44.1 billion issued this month on pace to fall below the $81.8 billion in June 2012.
“Credit investors will have to experience some disruption to the prior years’ utopian conditions, namely rising Treasury prices and equity prices,” analysts led by Matthew Mish at UBS AG wrote in a research report yesterday. “It appears this phenomenon could play out sooner rather than later.”
Solar Star, an under-construction California solar power plant linked to Berkshire Hathaway Inc., sold 5.375 percent bonds due June 2035 to yield 296 basis points more than benchmarks, Bloomberg data show. Proceeds from the offering, rated Baa3 by Moody’s Investors Service, will be used to help fund construction, according to a June 7 statement from the ratings company.