Bond Sales Slow in U.S. After Record January on Rates Concerns

Sales of corporate bonds in the U.S. are decelerating after a record start to the year, as investor demand is curbed by the prospect of rising interest rates.

Offerings this month of $74.5 billion compare with $128.1 billion in the corresponding period of January and $108.5 billion in the first 22 days of February 2012, according to data compiled by Bloomberg.

U.S. Federal Reserve policymakers said on Feb. 20 that the central bank should be ready to vary the pace of its $85 billion in monthly bond purchases, signaling borrowers may be weaned off stimulus measures that have helped keep benchmark Treasury rates low since 2008. Ten-year government note yields traded close to the highest in 10 months this week.

“The recent rise in Treasuries reminded investors that, if they’re the last ones to get out of low-coupon corporate bonds, they’ll be hurt the most,” Jody Lurie, a Philadelphia-based corporate credit analyst at Janney Montgomery Scott LLC, said in a telephone interview. “Corporate bonds have lost their pizzazz.”

Issuance in February follows January’s $170.8 billion, a record start to the year. Weekly sales were little changed, below the average from the past year of $28.1 billion, for the fifth straight week, Bloomberg data show.

Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, and New York-based Morgan Stanley led sales of at least $24.1 billion this week, compared with $24 billion in the five days ended Feb. 15, Bloomberg data show.

‘Substantial’ Improvement

The U.S. 10-year yield was little changed at 1.98 percent at 8:31 a.m. New York time, according to Bloomberg Bond Trader data. Yields reached 2.03 percent on Feb. 19, the highest since April 12.

Fed officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting.

The minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.

Spreads Increase

Yields on U.S. corporate debt decreased to 3.61 percent as of yesterday from 3.63 percent on Feb. 15 and Jan. 31, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index. Borrowing costs reached an unprecedented low of 3.52 percent on Jan. 23.

The extra yield investors demand to own the debt rather than government debentures increased 1 basis point to 220 basis points as of yesterday from 219 at the close of last week and at the end of January, according to the index.

Mitsubishi raised $2.25 billion in a four-part offering through lending unit Bank of Tokyo-Mitsubishi UFJ Ltd, including $750 million of 1.65 percent, five-year bonds that pay a relative yield of 80 basis points and $500 million of 3.2 percent, 10-year notes with a 120 basis-point spread, Bloomberg data show.

Sales this month of investment-grade debentures have reached at least $53.8 billion, compared with $104.7 billion and $85.4 billion in the corresponding periods last month and in February 2012 respectively, Bloomberg data show.

Morgan Stanley

Morgan Stanley raised $4.5 billion in its second benchmark-size bond deal this year, issuing $2.5 billion of 3.75 percent, 10-year notes at a spread of 178 basis points, $1.25 billion of 1.75 percent, three-year debt at a 140 basis-point spread and $750 million of three-year, floating-rate notes at 125 basis points more than the London interbank offered rate, Bloomberg data show. Libor is a rate at which banks say they can borrow in dollars from each other.

Offerings this month of speculative-grade bonds reached at least $20.8 billion versus $23.3 billion and $23.1 billion in the similar periods last month and in February 2012 respectively, Bloomberg data show.

High-risk, high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s.

Companies planning sales include Station Casinos LLC. with a $500 million issue of eight-year debt and Questar Gas Co. with a $150 million bond offering, Bloomberg data show.

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