Sales Approaching $4 Trillion in Stimulus Repast: Credit Markets
Corporate bond sales worldwide are approaching an unprecedented $4 trillion this year as yields touch all-time lows and investors pump record amounts of cash into fixed-income securities.
Abbott Laboratories (ABT) and United Technologies Corp. (UTX) led $3.94 trillion of offerings, according to data compiled by Bloomberg. The total exceeds the $3.89 trillion from 2009, when government guarantees aimed at rebuilding confidence in the banking system spurred issuance after the worst financial crisis since the Great Depression.
Companies from the neediest to the most creditworthy took advantage of borrowing costs that fell to a record-low 3.27 percent this week as central banks held down interest rates to prop up the economy. Investors also funneled $475.3 billion into bond funds as global growth, which slowed to an estimated 2.2 percent this year from 2.91 percent in 2011, prompted them to seek alternatives to equities.
“2012 was a great year for credit,” John Hines, the head of investment-grade syndicate at Wells Fargo & Co. in Charlotte, North Carolina, said in a telephone interview. “We saw very strong demand technicals over the course of the year. With that backdrop, issuers were keen to issue.”
Issuance soared, reaching a record $1.19 trillion in the first quarter, Bloomberg data show, as Federal Reserve Chairman Ben S. Bernanke held to his plan to keep interest rates near zero percent and as the European Central Bank injected cash into the financial system. Supply waned in the three months ended June, then jumped to $996.8 billion and $981.4 billion in the third and fourth quarters, respectively, both records for those periods.
“The market’s tone alternated between bearish and bullish but the events were the same events that the market has grappled with for years,” Mark Bamford, the New York-based head of global fixed-income syndicate at Barclays Plc, said in a telephone interview. “We had a year where there were no new shocks.”
Elsewhere in credit markets, a gauge of U.S. corporate credit risk pared gains as President Barack Obama was said to offer a scaled-back fiscal-cliff package in a meeting with congressional leaders three days before a year-end deadline for a budget deal.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 0.9 basis point to a mid-price of 95.7 basis points as of 11:33 a.m. in New York, after earlier reaching 97.1 basis points, according to prices compiled by Bloomberg. Obama will offer the narrower budget package at a White House meeting at 3 p.m. in Washington, a Democratic aide with knowledge of the plans said.
The credit-swaps measure typically rises as investor confidence deteriorates and falls as it improves. The contracts 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, added 0.35 basis point to 14.38 basis points as of 11:33 a.m. in New York, after earlier reaching 15.13. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.
Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded dollar-denominated corporate securities by dealers today, with 28 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.
Bond deals this year surpassed the previous record in 2009, when the U.S. Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program provided government backing for new senior unsecured debt to shore up confidence in the banking system.
“There was very strong demand for paper and issuers were keen to lock in low rates with the backdrop of potential market disruptions from Europe and the fiscal cliff,” Wells Fargo’s Hines said.
The Fed said Dec. 12 that it will continue quantitative easing, buying $45 billion a month of Treasury securities starting next month. It’s held interest rates at zero to 0.25 percent since December 2008 and for the first time linked the outlook for the benchmark rate to unemployment and inflation.
The global economy will expand 2.2 percent this year, the slowest growth since 2009, down 0.71 percentage point from 2011, according to the average estimate of economists surveyed by Bloomberg.
The yield on bonds worldwide fell 1.56 percentage points this year, Bank of America Merrill Lynch Global Corporate & High Yield index data show. Borrowing costs have tumbled from an all- time high of 9.05 percent in October 2008, when credit markets seized in the weeks following the collapse of Lehman Brothers Holdings Inc.
“It’s a different world,” Sabur Moini, who manages about $2.5 billion of high-yield assets at Payden & Rygel in Los Angeles, said in a telephone interview. “The Fed’s zero interest rate policies are going to be with us next year and maybe even until 2014 and 2015. We’ve all had to adjust to a lower-yield world,” he said, adding that spreads are still attractive.
The extra yield investors demand to own corporate bonds rather than government debentures declined to 219 basis points as of Dec. 26 from 351 basis points at year end, and compare with an average of 117 basis points between 2005 and 2007, Bank of America Merrill Lynch index data show.
The record amount of money funneled into bond funds this year outpaced the $99 billion of net inflows in 2011, according to EPFR Global, a research firm in Cambridge, Massachusetts. All equity funds posted a collective outflow of $66.9 billion this year.
Issuance in the U.S. reached a record, climbing 31 percent to $1.47 trillion, exceeding the previous all-time high of $1.24 trillion in 2009, Bloomberg data show. Sales of high-yield bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, reached $354 billion. That’s 23 percent above the previous record of $288 billion set in 2010.
“They are trying to capture the high level of demand that is prevalent in the market,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “For the riskier companies they particularly don’t want to wait until things get worse,”
JPMorgan Chase & Co. was the largest global company bond underwriter for the fifth straight year, with a market share of 7.3 percent, according to Bloomberg data that excludes self-led deals. The biggest U.S. bank by assets was followed by Citigroup Inc., Bank of America Corp., Deutsche Bank AG and Barclays Plc.
A $14.7 billion offering from drug and medical-device maker Abbott last month was the biggest dollar-denominated sale since February 2009, when Roche Holding AG (ROG) issued $16 billion of debt, Bloomberg data show. United Technologies Corp. sold $9.8 billion of debt in the year’s second-biggest dollar sale to help finance its acquisition of Goodrich Corp.
With this year’s drop in interest rates erasing next year’s price return potential, investment-grade returns will plunge to about 1.6 percent in 2013 from 10.2 percent this year, according to a Dec. 3 research note from Bank of America. High-yield will fall to about 7 percent next year from 13.2 percent in 2012.
High-grade funds in the U.S. reported about $860 million of outflows in the week ended Dec. 19, their first in more than a year, while dollar high-yield funds reported outflows of about $360 million, according to a Dec. 20 Bank of America report.
Issuance next year of investment-grade dollar debt will drop roughly 16 percent to $800 billion due to rising interest rates and less favorable liquidity conditions in the second half of 2013, according to the Dec. 3 report.
Next year, central banks will start raising interest rates and trigger “the ‘great rotation’ out of bonds, into equities,” analysts led by Bank of America’s Hans Mikkelsen wrote in the Dec. 3 report.
To contact the reporter on this story: Sarika Gangar in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Alan Goldstein at email@example.com