Yield Hunt Driving Demand for Longest Maturity Debt Sales: Credit Markets
Longer-maturity bonds account for the greatest share of issuance in three months as companies take advantage of record-low borrowing costs and investors’ expectations that inflation will stay low in a slowing recovery.
Norfolk Southern Corp. offered the first 100-year bonds since 2005, boosting sales of debt maturing in 10 or more years to $43.7 billion this month, or 48.7 percent of all offerings, according to data compiled by Bloomberg. Investment-grade debt yields fell to 3.79 percent on Aug. 19, according to Bank of America Merrill Lynch Index data, the lowest on record.
The longer-maturity corporate debt is outperforming notes due in one to three years by the most since July 2009 amid signals the Federal Reserve expects economic growth to be weaker than anticipated and as inflation slows. Futures show a 98.6 percent chance the central bank won’t raise its target rate for overnight loans between banks by a quarter-percentage point or more by December.
“Investors are scrambling for every bit of yield that they can get,” said Kathleen Gaffney, co-manager of the flagship $19 billion Loomis Sayles Bond Fund, which has beaten 94 percent of its peers over the past five years. “Given that we’re likely to stay in a low-rate environment for some time, corporates are probably one of the most attractive places in the capital markets right now.”
Investment-grade corporate bonds due in 15 years or more yield 208 basis points, or 2.08 percentage points, more than similar-maturity Treasuries, compared with a low this year of 167 basis points on April 21, and an average spread of 202 in 2007 and 134 in the prior year, Bank of America Merrill Lynch index data show.
“We’ve rallied hard, but you still have spreads on long debt,” said Joseph Balestrino, fixed-income strategist at Federated Investors Inc. in Pittsburgh, which oversees about $336 billion in assets. “Treasurers are saying ‘Heck, what’s the risk of borrowing money at these levels?’”
Elsewhere in credit markets, a benchmark gauge of corporate credit risk in the U.S. rose to the highest in five weeks as a drop in U.S. home sales stoked concern the economic recovery is faltering.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2.9 basis points to a mid-price of 112.31 basis points as of 1:08 p.m. in New York, the highest since July 19, according to Markit Group Ltd.
Sales of U.S. previously owned homes plummeted to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington.
The extra yield investors demand to own company bonds instead of government debt was unchanged at 176 basis points, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index. Yields averaged 3.501 percent.
Treasuries remained higher as the government sold $37 billion of two-year securities, the second of four note and bond auctions this week totaling $109 billion. The auction drew a record low yield of 0.498 percent, compared with the 0.499 percent forecast in a Bloomberg News survey of 7 of the Federal Reserve’s 18 primary dealers.
The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions. The two-year note yield dropped to an all-time low earlier after a report showed sales of existing homes tumbled in July.
Concern that the global economic recovery is faltering is fueling a rally in fixed-income assets. A report this week will probably show second-quarter gross domestic product grew 1.4 percent, less than previously estimated, according to Bloomberg surveys of economists.
The Fed has kept its target overnight lending rate between banks in a range of zero to 0.25 percent since December 2008.
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said Aug. 10 in a statement.
Corporate bonds maturing in 15 years or more have returned 3.8 percent this month, beating corporate notes due in 1 to 3 years by 3.39 percentage points, Bank of America Merrill Lynch index data show. Longer-dated bonds are the best-performing maturities this year, returning 15.37 percent.
“The risk with long credit is higher interest rates, but as long as you’ve got the economy growing below trend and you’ve got inflation coming down, the risk of higher rates is relatively low,” said Mark Kiesel, global head of corporate bond portfolios at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest bond-fund manager. The longer maturity returns are “attractive versus most other asset classes,” he said.
Norfolk Southern, the fourth-largest U.S. railroad, sold $250 million of 100-year bonds in a reopening to yield 5.95 percent, Bloomberg data show. The Norfolk, Virginia-based company earlier marketed $100 million of the debt.
“People take comfort in the fact that railroad companies have been through many cycles of ups and downs,” said David Tiberii, a money manager who helps oversee $20 billion investment-grade corporate debt at T. Rowe Price Group Inc. in Baltimore. “For me, 100 years is a little long.”
San Diego Gas & Electric Co., the third-largest investor- owned gas and electric utility in California, sold 30-year bonds at the same interest rate as top-rated Johnson & Johnson, matching the lowest coupon on record for debt of that maturity.
The Sempra Energy unit, ranked five levels below drugmaker J&J by Moody’s and S&P, issued $500 million of 4.5 percent securities that yield 88 basis points more than similar-maturity Treasuries, Bloomberg data show.
Corporate borrowers have sold at least $10.4 billion of 30- year bonds this month, the most since March, as they take advantage of yields on the securities near the lowest in at least 23 years.
The average yield on investment-grade debt maturing in more than 15 years declined to 5.43 percent on Aug. 19, according to Bank of America Merrill Lynch index data, the lowest since the daily index tracking such bonds began in 1986.
“As yields for Treasuries have declined and the curve has flattened, the only way for incremental return is to take credit risk,” said Scott Minerd, chief investment officer for Guggenheim Partners LLC, which has more than $100 billion in assets under supervision. “Thirty years ago GM was a double-A rated credit. I don’t believe anyone in the world of corporate credit can predict what a company will do in 30 years.”