Companies Double Up on Bond Sales With No Summer Lull

Goldman's Swell: Feeling 'Bubbleicious' in Credit Markets

U.S. companies have sold more than $245 billion -- or almost a quarter of all bonds issued this year -- in only seven weeks. And investors can’t get enough, driving down borrowing costs for even the junk-rated issuers to 14-month lows.

“To borrow a phrase from a couple great singers in history, it’s feeling a little bubblelicious in the credit markets,” Mike Swell, co-head of global portfolio management for fixed income at Goldman Sachs Asset Management, said in an interview on Bloomberg TV.

With the month not even half over, more than $30 billion in issuance this week has already cemented August as the busiest since 2010 for debt sales by blue-chip companies, according to data compiled by Bloomberg. The high-yield market is also showing signs of life, with junk-rated companies selling more than $11 billion of notes this month, compared with $14.5 billion in July.

Bond sales are booming as investors around the world seek refuge from central bank stimulus spanning Europe to Japan. Easy-money policies got another boost when the Bank of England cut interest rates last week and expanded quantitative easing to help support the U.K. economy following Britain’s vote to leave the EU. With about $12 trillion of debt yielding negative, investors are streaming into the U.S. in search for income.

“It’s challenging out there,” said Gautam Khanna, a money manager at Insight Investment, which oversees $137 billion of fixed-income assets. “We’re trying to balance how much credit risk we want to take with the demands for income and yield.”

Companies that sold bonds this week include drugmaker Amgen Inc. and hospital operator HCA Holdings Inc.

Defaults Rise

Junk bond sales are up just when the default rate for the past 12 months rose to 5.1 percent in July from 4.9 percent in June, according to Fitch Ratings. Energy companies, which have defaulted on $45.5 billion in bonds over the past 12 months, make up 60 percent of all defaults, according to a report by Fitch analysts Eric Rosenthal, Michael Paladino and Sharon Bonelli.

“Over the last year or so, energy really has been the big theme that we have been discussing,” Rosenthal said in an interview. “It’s pretty much driving all the defaults.”

Moody’s Investors Service and S&P Global Ratings have also warned that the high-yield default rate is climbing. The risk is being exacerbated by yield hungry investors who are accepting increasingly weak protections, Moody’s said in its midyear report on North American high-yield covenants.

“People want more and more yield,” Swell said. “This rush in demand for yield is something that will last, and will work, until it doesn’t work anymore, and like we saw pre-financial crisis, is something that doesn’t end very well."

(Corrects name of Insight Investment in fifth paragraph.)
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