Haven Appeal Sends Bond Sales Above $2 Trillion: Credit Markets
Companies worldwide are selling bonds at the second-fastest pace on record with investors seeing the debt as an alternative to traditional havens such as government securities that are now paying negative yields.
Anheuser-Busch InBev NV (ABI), the world’s biggest brewer, and Mexico City-based America Movil SAB de CV lead sales this week of at least $74.2 billion, bringing this year’s total to $2.08 trillion, according to data compiled by Bloomberg. That’s second only to the $2.37 trillion issued at this point in 2009.
Investors are seeking corporate bonds with investment-grade yields that average a record-low 3.13 percent, or 2.13 percentage points more than government securities, and balance sheets that hold near record amounts of cash, according to Bank of America Merrill Lynch index data. At the same time, stocks and commodities are losing money as Europe’s debt turmoil spreads and the global economy falters.
“For an increasing number of investors, corporate bonds are serving as de facto substitutes for Treasury securities, but with higher yields,” Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview.
Company bond offerings are exceeding the pace set in the same period of 2011 by $3.2 billion, Bloomberg data show. Sales slumped in April after a record first quarter amid Europe’s deepening debt strains and signs of a U.S. economic slowdown.
Corporate debt has returned 6.45 percent this year, already exceeding the 5.16 percent in all of 2011, according to the Bank of America Merrill Lynch Global Broad Market Corporate index. That compares with a 3.63 percent return, including reinvested dividends, on the MSCI All-Country World Index of stocks and a loss of 4.65 percent on the Standard & Poor’s GSCI Spot Index of 24 commodities.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. declined, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.4 basis point to a mid-price of 112.8 basis points as of 11:22 a.m. in New York, according to prices compiled by Bloomberg.
The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of bond market stress, increased 0.5 basis point to 23 basis points as of 11:25 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
Bonds of Mexico-based Grupo Financiero BBVA Bancomer SA are the most actively traded dollar-denominated corporate securities by dealers today, with 61 trades of $1 million or more as of 11:35 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The unit of Banco Bilbao Vizcaya Argentaria SA, Spain’s second- largest lender, sold $1 billion of 6.75 percent, 10-year bonds yesterday.
Five-year credit-default swaps on JPMorgan Chase & Co. fell 3.7 basis points to a mid-price of 125.1 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s about the lowest since May 10, the day JPMorgan first disclosed a loss from credit derivatives traded in its chief investment office in London, prices compiled by Bloomberg show.
Global bond offerings are reviving after sinking in April to $209.6 billion, the slowest month of the year, Bloomberg data show. Sales reached a record $1.2 trillion in the first quarter. Issuance was $3.92 trillion in all of 2009.
Average yields on investment-grade corporate bonds are down from this year’s high of 3.99 percent on Jan. 3 on the Bank of America Merrill Lynch Global Broad Market Corporate index.
Even as yields tumble, investors still benefit from the gap with government debt. The extra yield investors demand to hold investment-grade company bonds rather than government debt is 19 basis points more than the low this year on March 20 and compares with 78 basis points five years ago before the credit seizure, Bank of America Merrill Lynch index data show.
In the U.S., sales revived this week to at least $33.8 billion from $1.2 billion in the holiday-shortened period ended July 6 and compare with a weekly average of $26 billion this year, Bloomberg data show.
“For issuers these circumstances are a boon,” Marrinan said. “Near record-low Treasury yields and enormous global demand for high-quality corporate exposure make for excellent conditions to borrow.”
Investor confidence in corporate debt may also be bolstered by a default rate of 2.7 percent as of the end of the second quarter, compared with a historical average of 4.8 percent since 1983, according to Moody’s. The ratings firm forecasts the rate will rise to 3 percent by year-end.
Monsanto Co., the world’s biggest seed company, issued debt including $250 million of 30-year bonds at a 3.6 percent coupon, the lowest for that maturity, on July 9, Bloomberg data show.
America Movil sold $1.25 billion of 3.125 percent, 10-year notes yielding 168 basis points more than similar-maturity Treasuries and $750 million of 4.375 percent, 30-year securities, the data show.
“They got tight spreads over an incredibly low base interest rate,” said Francis Rodilosso, an investment manager at Van Eck Associates Corp., calling the wireless carrier controlled by billionaire Carlos Slim a “highly-regarded” emerging market issuer.
The International Monetary Fund will cut its 3.5 percent estimate for global growth this year, Managing Director Christine Lagarde said last week. The “key emerging markets” of Brazil, China and India are showing signs of slowdown and the IMF’s growth outlook “has regrettably become more worrisome,” Lagarde said July 6 in Tokyo.
The IMF managing director is pressing for fiscal union in Europe to aid growth and financial stability as nations such as Greece confront a sovereign-debt crisis.
S&P said yesterday that it downgraded 155 issuers worldwide and upgraded 125 during the second quarter.
Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record 1.46 percent and minutes from the Fed’s last meeting on June 19-20 showed some members favor more stimulus.
“People are searching for ways to find extra yields other than Treasuries,” Rob Crimmins, a portfolio manager at RS Investments in New York, which oversees $30 billion, said in a telephone interview. “The logical place to go is the corporate market.”
Two-year German government debt reached minus 0.04 percent and France sold its first-ever bills at negative yields yesterday. Borrowing costs slid as the European debt crisis, now in its third year, drives investors to the safest assets.
The ratio of cash to total assets for companies in the Standard & Poor’s 500 Index stands at about 9.8 percent, down from a recent peak of 10.3 percent in September, data compiled by Bloomberg show. Five years ago, the ratio was 5.7 percent.
“There are certain assets that are being crossed off investors’ lists,” Justin D’Ercole, head of Americas investment grade syndicate at Barclays Plc in New York, said in a telephone interview. “What you’re getting is massive crowding into dollar-denominated investment-grade credit.”
Anheuser-Busch InBev’s offering, the second biggest of the year, will help finance its acquisition of a stake in Grupo Modelo SAB de CV. The deal was increased from an original range of between $4 billion and $5 billion, said D’Ercole, who was one of the bookrunners on the deal.
The coupons on the three-, five-, 10- and 30-year bonds were the company’s lowest on record for the maturities, Bloomberg data show.
“Investors are presented with a dilemma every time an issuer prints a record low coupon,” Marrinan said. “Buy more low coupon exposure, or pass and miss the chance to put the cash to work?”
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