Corporate Bond Sales Slump for Seventh Week in U.S., End Drought in Europe
U.S. Bancorp, the Minnesota lender, and tobacco company Altria Group Inc. led $7.9 billion of corporate bond sales in the U.S. as issuance fell short of the 2010 average for a seventh straight week.
U.S. Bancorp, the sixth-largest U.S. bank by assets, sold $1 billion of three-year debt in its fourth offering this year, according to data compiled by Bloomberg. Marlboro cigarette maker Altria issued $800 million of 5 1/4-year notes as it prepares to repay $775 million of bonds this month. In Europe, companies issued 2.9 billion euros ($3.5 billion) of debt, up from the 2.1 billion euros of sales last week that ended a two- month drought.
The extra yield investors demand to own U.S. investment- grade corporate debt instead of Treasuries rose 5 basis points this week to 213 basis points, the highest since Dec. 8, according to the Bank of America Merrill Lynch U.S. Corporate Master Index, while spreads in Europe also widened. Europe’s debt crisis and lower-than-estimated U.S. job growth have fueled skepticism about the global economic recovery, said William Larkin, fixed-income portfolio manager at Cabot Money Management.
“You’ve got investors changing their minds very rapidly, and that’s never a great indication of economic health,” said Larkin, who helps oversee $500 million at Salem, Massachusetts- based Cabot. “We have a bond market that’s extremely expensive, and that combination makes people like myself nervous.”
Company bond sales increased in Europe, with deals from Caterpillar Inc., the largest maker of construction equipment, and U.K. bus and rail operator National Express Group Plc. Company debt spreads in the region rose 6 basis points this week to 207, after widening to a 10-month high of 209 basis points on May 25, according to Bank of America Merrill Lynch index data.
Issuance climbed as 81 billion euros of securities come due this month, the most so far this year, according to ING Groep NV data. Investors may use some of the money they get back from maturing bonds to buy more securities, driving companies to return to the market after issuance plummeted 66 percent to a record-low 14 billion euros in May amid the region’s sovereign debt crisis.
“Bond redemptions are forcing cash into the hands of investors and many will be losing patience earning the lower rates” from other investments, said Charles Stephens of Matrix Corporate Capital Ltd. in London. “When faced with a solid investment-grade company like Caterpillar or a high enough premium from a lower-rated issuer like National Express, there will be buyers for the debt.”
The number of bonds coming due in Europe will reach 81 billion euros in June, up from 60 billion euros in April. Redemptions for the year are forecast to reach 700.6 billion euros, according to ING.
“Supply is tentatively trying to come back” in Europe, said Suki Mann, head of credit strategy at Societe Generale SA in London.
Caterpillar, based in Peoria, Illinois, priced its 300 million euros of three-year bonds to yield 85 basis points over the benchmark mid-swap rate yesterday, issuing the debt through its Caterpillar International Finance Ltd. unit. The spread has since tightened 16 basis points to 69 basis points, according to ING prices on Bloomberg.
London-based National Express priced its debt to yield 310 basis points more than U.K. government debt, and the securities now trade at a spread of 303 basis points, Lloyds Banking Group Plc prices on Bloomberg show. The proceeds will be used to repay part of the transport company’s bank borrowings, it said in a statement.
“Corporate borrowers still have the ability to tap the markets as long as deals are well-priced in quality names raising funds for legitimate reasons,” said Norval Loftus, chief investment officer at London-based Allegra Asset Management, who says he bought both Caterpillar and National Express bonds.
Swedish lender Nordea Bank AB and BPCE SA, France’s second- largest retail bank, were among financial companies that sold floating-rate notes in Europe this week, Bloomberg data show. Nordea issued 1 billion euros of three-year notes and BPCE raised 600 million euros from securities due in December 2011. Rabobank Nederland NV also sold 1 billion euros of three-year FRNs, according to the data.
Overall U.S. company bond sales declined 2 percent and have trailed the average for this year in every week since April 23, according to Bloomberg data. Absolute U.S. bond yields rose to 4.66 percent from 4.51 percent, Bank of America Merrill Lynch index data show. A basis point is 0.01 percentage point.
Spreads on high-yield bonds in the U.S. widened 5 basis points to 719 basis points this week, Bank of America Merrill Lynch index data show. They touched 727 on June 8, the highest since Dec. 8. Yields rose to 9.49 percent from 9.33 percent. High-yield, or junk, bonds are those rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
High-yield U.S. bond sales of $1.2 billion were less than a quarter of this year’s weekly average, Bloomberg data show. Junk issuers are poised to fall short of the $6.8 billion of securities sold in May, the lowest since March 2009.
“Lower-grade” corporate bonds are “really cheap,” Dan Fuss, who helps oversee $145 billion of assets as vice chairman of Loomis Sayles & Co., said yesterday in a Bloomberg Television interview. “By being a buyer when there’s a thin market, you can get some reasonable values,” he said.
More than a third of this week’s U.S. company bond sales came yesterday, as the Standard & Poor’s 500 Index rallied the most in two weeks after economic reports from China, Japan and Australia boosted optimism. China’s exports jumped the most in six years Japan’s economy grew at an annualized 5 percent rate in the first quarter. Australian employers added workers in May for a third straight month.
Bank of Nova Scotia issued $1 billion of debt due in December 2013 and Deere & Co. sold $500 million of three-year notes to lead $2.75 billion of U.S. issuance, Bloomberg data show.
Deere, the world’s largest farm equipment maker, boosted the offering through the John Deere Capital Corp. finance unit from the $300 million that was initially marketed, according to a person familiar with the transaction.
The euro weakened to as low as $1.1877 on June 7, the lowest since March 2006 as concern about the ability of Europe’s southern nations to plug record budget deficits roiled bond markets. European Union President Herman Van Rompuy said yesterday a 750 billion-euro rescue package will be increased if it fails to quell volatility.
“It’s been a tough month, I would say, though the most positive thing is we put value back in the market, so you can really look at the upside,” Andrew Feltus, a money manager who helps oversee $8 billion of high-yield debt at Pioneer Investment Management in Boston, said yesterday in a Bloomberg television interview.
This week’s U.S. corporate bond sales compare with $8.1 billion in the period ended June 4 and an average for this year of $19.7 billion, Bloomberg data show.
“You have to watch what you’re buying and watch the spreads you’re buying at,” said Cabot’s Larkin. “Because if you don’t, it could backfire pretty quickly.”