U.S. Beats World With Most Offerings Since March: Credit Markets
Sales of company bonds in the U.S. soared to the fastest pace since March this week, five times quicker than global issuance, as cash-flush investors push yields to record lows.
PepsiCo Inc. (PEP), the biggest snack-food maker, and Richmond, Virginia-based Altria Group Inc. (MO) led dollar-denominated sales this week of at least $37.3 billion, up 45 percent from the period ended Aug. 3, according to data compiled by Bloomberg. Sales worldwide increased 9 percent to $64 billion.
U.S. financial assets, and corporate bonds in particular, are seen as the safest place to invest in a slowing global economy with default rates below historic averages and cash on company balance sheets at about record highs. Investors have poured a record $43 billion this year into high-yield mutual funds, according to EPFR Global in Cambridge, Massachusetts.
“People have money and the market is rallying,” Marc Gross, a money manager at RS Investments in New York who oversees $3 billion in fixed-income funds, said in a telephone interview. As an investor, “you don’t want to fall behind. There’s all these incredible amounts of issuance and that’s what’s behind it: there’s cash to buy it,” he said.
Yields on bonds from the most creditworthy to the riskiest borrowers reached a record low 3.902 percent on Aug. 2, before climbing to 3.946 percent as of yesterday, Bank of America Merrill Lynch index data show. The yield investors demand to own corporate bonds rather than government debentures has declined 76 basis points to 267 basis points from this year’s high of 343 on Jan. 3.
The ratio of cash to total assets at Standard & Poor’s 500 companies stands at about 9.8 percent, after reaching a record 10.2 percent in October 2011, Bloomberg data show. Five years ago, the ratio was 5.6 percent.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose for a second day, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 0.5 basis point to a mid-price of 103.5 basis points as of 11:39 a.m. in New York, according to prices compiled by Bloomberg.
The measure typically rises as investor confidence deteriorates and falls as it improves. 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 debt market stress, decreased 0.13 basis point to 20.5 basis points as of 11:39 a.m. in New York. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.
Bonds of Overland Park, Kansas-based Sprint Nextel Corp. are the most actively traded dollar-denominated corporate securities by dealers today, with 148 trades of $1 million or more as of 11:40 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The third-biggest U.S. wireless carrier sold $1.5 billion of 7 percent, eight-year debt yesterday at par. The securities rose to 100.125 cents on the dollar for a yield of 6.98 percent as of 11:37 a.m. in New York, Trace data show.
Bond sales in the U.S. are up from $25.7 billion in the five days ended Aug. 3 and compare with a 2012 weekly average of $26.1 billion, Bloomberg data show. Sales reached a record $60 billion in the period ended March 9 as credit rallied on reports that Greece was closing in on a deal with creditors for a debt restructuring.
“Cash flow is excellent, refinancing is easy,” James Kochan, chief fixed-income strategist at Wells Fargo Fund Management LLC in Menomonee Falls, said in a telephone interview. “You’re in the phase of the business cycle where you should be optimistic about corporates.”
While worldwide sales are up from $58.6 billion last week, they’re below this year’s average of $73.2 billion for the fourth straight period, Bloomberg data show.
The International Monetary Fund lowered its 2013 global growth forecast to 3.9 percent from the 4.1 percent estimate in April as Europe’s debt crisis prolongs Spain’s recession and slows expansions in emerging markets from China to India.
In the U.S., fewer Americans filed applications for unemployment benefits last week, with jobless claims dropping by 6,000 to 361,000 in the period ended Aug. 4, the Labor Department figures released yesterday show.
“There’s a gradual improvement on the layoffs side,” said Peter Newland, an economist in New York for Barclays Plc, who projected claims would drop to 360,000. There will be “a bit of a rebound in the second half. It’s not going to be spectacular, but it should be better than the first half,” he said.
About 72 percent of S&P 500 companies which reported second-quarter results have beaten analysts’ earnings estimates, though 59 percent missed sales projections, Bloomberg data show.
The global default rate for speculative-grade debt this year will hold at least 1.7 percentage points below its historical average, Moody’s said in an Aug. 7 report. The trailing 12-month rate was 2.8 percent in July, compared with a historical average of 4.8 percent since 1983.
“It’s been a mistake to be away from the corporate markets,” Kochan said. “There’s still very strong demand for both high-yield and investment grade. They are the two best year-to-date performers by a significant margin,” within the fixed-income arena, he said.
PepsiCo, based in Purchase, New York, sold $2.5 billion of debt on Aug. 8, including $1 billion of 1.25 percent, five-year securities that yield 63 basis points more than similar-maturity Treasuries; $900 million of 0.7 percent, three-year notes at a spread of 33 basis points; and $600 million of 3.6 percent, 30-year bonds at 95 basis points, Bloomberg data show.
“Cash is flowing into the markets, companies are being opportunistic and interest rates are so low,” said Gross of RS Investments. “Everything seems clear, at least for now, and everybody is jumping back in.”
Investment-grade bond funds had inflows of $733 million and high-yield bond funds took in $402 million last week, according to JPMorgan research.
Junk-bond funds received $9.32 billion of inflows in July, the most since February, sending the 2012 total 30 percent higher than the previous full-year record, according to EPFR.
Altria, the largest U.S. seller of tobacco, issued $2.8 billion of securities, including $1.9 billion of 2.85 percent, 10-year bonds. Proceeds will be used to help the company fund its $2 billion tender offer for higher-coupon debt.
“You don’t know when the money’s going to stop flowing or when the market sentiment is going to change,” Gross said. “It’s always a game of musical chairs. Someone always get stuck with the last bad deal. But, right now, the music is still playing.”
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