Euro Calm Spurs Fastest Bond Sales Since March: Credit Markets
Borrowers taking advantage of relative calm in financial markets have issued $72.2 billion of corporate debt in the fastest start to a month since March as the euro zone enters one of the most pivotal periods in its 13- year history.
Issuance, which follows the busiest August on record, is being “turbo-charged by people trying to get ahead of Europe, in case something unexpectedly bad happens,” Jason Rosiak, the head of portfolio management at Pacific Asset Management, the Newport Beach, California-based affiliate of Pacific Life Insurance Co., said in a telephone interview.
WellPoint Inc. (WLP), the second-biggest U.S. health insurer, raised $3.25 billion for its acquisition of Amerigroup Corp., leading the most issuance since $83.4 billion of bonds were sold in the period ended March 6, according to data compiled by Bloomberg. Rio de Janeiro-based Vale SA (VALE5) raised $1.5 billion in its first sale of 30-year securities since 2009.
Borrowers are obtaining record-low yields during a lull in the European crisis that’s roiled markets for more than two years. While European Central Bank President Mario Draghi bolsters confidence in the euro with an agreement for unlimited bond purchases, Germany’s Constitutional Court is poised to rule on the legality of a bailout fund, Greece’s institutional creditors are to decide if the country merits access to aid that would help it stay in the European Union and Dutch citizens will vote on parties including a group that wants to exit the 17- nation bloc.
Yields on bonds from the most creditworthy to the riskiest borrowers reached a record low 3.695 percent on Sept. 3, before rising to 3.697 percent, the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield index shows.
“This is kind of the home stretch for the end of the year,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “Companies don’t want to wait until the last minute.”
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, reached a 16-month low on Sept. 4. The Euribor-OIS spread, a measure of European banks’ reluctance to lend to one another, held near the lowest level in more than 14 months yesterday.
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell the most in more than a month, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 4.7 basis points to a mid-price of 95.9 basis points as of 11:51 a.m. in New York, according to prices compiled by Bloomberg.
That’s the lowest level on an intra-day basis since May 4 for the measure, which 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 market for corporate borrowing through commercial paper contracted for the first time in four weeks. The seasonally adjusted amount of U.S. commercial paper fell $9.9 billion to $1.022 trillion outstanding in the week ended yesterday, the Federal Reserve said on its website. That’s the first decline since the market shrank $20.8 billion in the period ended Aug. 8 and the lowest level since Aug. 15.
Bonds of WellPoint are the most actively traded dollar- denominated corporate securities by dealers today, with 122 trades of $1 million or more as of 11:53 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Corporate bond sales from the U.S. to Europe and Asia in September compare with $33 billion from Sept. 1-6 of last year, Bloomberg data show. Companies issued $251.8 billion of debt in August, the most on record for the month. Sales soared in March amid signs of an improving economy, including U.S. household confidence at the highest level in almost four years as measured by the Bloomberg Consumer Comfort index.
Yields on the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield index have fallen from this year’s high of 4.822 percent on Jan. 3. The extra yield investors demand to own corporate bonds rather than government debentures has declined from a 2012 peak of 345 basis points, also on Jan. 3, to 263 basis points.
“Circumstances in the financial markets are exceptional,” Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview. “Investors have a strong demand for spread product, risk-free rates are near historic lows and central banks seem poised to keep these conditions in place.”
Offerings in the U.S. reached $31 billion this week, the most since $31.2 billion was raised in the two-day period ended Nov. 8, 2011, Bloomberg data show. Issuers rushed to market on Sept. 4, following the nation’s Labor Day holiday, sending sales to $17.1 billion.
“This new-issue volume in investment grade and high yield is unheard of for this week,” Pacific Asset Management’s Rosiak said.
The offering from Wellpoint included $1 billion each of 3.3 percent notes due January 2023 that yielded 175 basis points more than similar-maturity Treasuries and 4.65 percent bonds maturing in 2043 at a spread of 200 basis points, Bloomberg data show. The Indianapolis-based operator of Blue Cross and Blue Shield insurance plans also sold $625 million each of 1.25 percent, three-year notes at 95 basis points and 1.875 percent securities due January 2018 at 130.
Vale, the world’s biggest iron-ore producer, sold 5.625 percent debt achieving its lowest coupon on record for similar- maturity debt, Bloomberg data show. The company last sold 30- year debt in November 2009, issuing $1.75 billion of 6.875 percent securities.
Issuance of investment-grade bonds maturing in 30 years or more in the U.S. already exceed the annual totals in 2010 and 2011 as companies lock in borrowing costs at record lows, Bloomberg data show.
European companies raised about 16.7 billion euros ($21 billion) of debt this week, making it the busiest since the period ended March 18, Bloomberg data show. Electricite de France SA and German carmaker Daimler AG led 9.6 billion euros of corporate debt sales on Sept. 4, the region’s most active day in 18 months.
Average yields on investment-grade securities dropped to 2.59 percent, Bank of America Merrill Lynch’s EMU Corporate Index shows, compared with 4.4 percent at the start of the year.
Borrowers from the region’s peripheral nations aren’t benefiting from lower borrowing costs. Telefonica SA (TEF), Spain’s biggest phone operator, paid 485 basis points more than the benchmark swap rate to sell 750 million euros of five-year bonds yesterday, Bloomberg data show. That compares with a spread of 300 basis points when the Madrid-based company raised 1.5 billion euros of six-year notes on Feb. 7.
“There’s a lot of issuance for opportunistic reasons given financing is very cheap,” said Oliver Woyda, a money manager at Deka Investment GmbH in Frankfurt. “The peripheral companies have started issuance as well, even though it’s still expensive for them. These companies are fearing that markets might be closed for them suddenly if Draghi doesn’t deliver.”
The ECB’s bond-buying program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said at a news conference in Frankfurt. “Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area.”
Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund on Sept. 12. That day, the Netherlands also holds elections where voters will decide among parties including the Socialists, who oppose spending cuts, and the Freedom Party, which is seeking an exit from the EU. Greece is negotiating for more-lenient terms for its 240 billion-euro bailout with the ECB, European Commission, and the International Monetary Fund.
The U.S. two-year interest-rate swap spread narrowed to 16.25 basis points on Sept. 4, the lowest level since April 2011, before climbing to 16.63 yesterday. The measure shrinks when investors favor assets such as corporate bonds and expands when they seek the perceived safety of government securities.
The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, was at 19 basis points yesterday, the lowest since June 2011, from 95 basis points at the start of the year.
“It’s an issuers’ market, but, if they wait too long, it might not be the best possible time to issue,” Lurie said.
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