Bond Cliff Looms With Slowest Sales Since 2008: Credit Markets

Company bond sales worldwide are on pace for the slowest February since 2008 as the prospect of rising interest rates in the U.S. and persistent recession in Europe quashes the busiest start to a year on record.

“Economic conditions don’t warrant necessarily any significant increases in funding,” Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney in Purchase, New York, said in a telephone interview. “In terms of balance sheet and liquidity, cash on hand and refunding, the lion’s share of all that balance sheet repair work has been done.”

Ashland Inc., the biggest producer of specialty paper-making chemicals, and Newbury, England-based Vodafone Group Plc are leading sales of at least $207.1 billion, down 50 percent from $415.6 billion in February 2012, according to data compiled by Bloomberg. Offerings have fallen from an unprecedented $425 billion in January.

Debt maturing in three years accounted for 23.2 percent of U.S. sales this month, the biggest share since March 2011, amid concern borrowing costs may rise as the Federal Reserve signals it may wean the economy off stimulus measures. In Europe, companies are avoiding the bond market as they accumulate more than three times the cash they held a decade ago, with the European Commission forecasting the euro area will shrink for a second year.

Accumulating Cash

Yields on global corporate bonds from the riskiest to the most creditworthy have risen to 3.3 percent as of Feb. 25 from an all-time low of 3.24 percent on Dec. 28, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. The extra yield investors demand to own the debt rather than government debentures has narrowed 8 basis points during the same period to 211 basis points.

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 1 basis point to a mid-price of 88.4 basis points as of 10:54 a.m. in New York, according to prices compiled by Bloomberg. The measure has declined from 90.2 basis points on Feb. 25, the highest level in three weeks.

Swap Spreads

The index 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.

In London, the Markit iTraxx Europe Index a credit-default swaps benchmark of 125 companies with investment-grade ratings fell 3.3 to 119.1.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.93 basis point to 15.75 basis points as of 10:57 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 company debentures.

Bonds of New York-based Goldman Sachs Group Inc. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 3.1 percent of the volume of dealer trades of $1 million or more, at 11 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

February Sales

February’s corporate bond sales have been the slowest since $170.3 billion in the similar period in 2008, Bloomberg data show. Issuance is 30 percent below the $297.9 billion February average from the past five years.

“It’s hard to top what happened last February,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “There’s still demand, but it’s a little bit spottier than last year.”

Ashland raised $2.3 billion with senior unsecured notes to pay back a portion of its secured loans. The chemicals maker’s sale included $600 million of 3 percent debt due in 2016 that yields 260 basis points more than similar-maturity Treasuries, $650 million of 4.75 percent bonds maturing in 2022 with a 290 basis-point spread and $700 million of five-year bonds with a

3.875 percent coupon that pay 304 more than benchmarks, Bloomberg data show.

Three-Year Debt

Borrowers in the U.S. issued $20.3 billion of debt maturing in about three years this month, the biggest share since March 2011, when they made up $36.6 billion or 23.5 percent of sales, Bloomberg data show. The share of 30-year debt being sold fell to 5.5 percent from 7.7 percent last month.

“We’ve been on a floater, non-standard tenor tear,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc., said in a telephone interview. “You’ve had a whole gamut of spreads and products.”

Benchmark 10-year Treasury yields closed above the 2 percent mark this month for the first time since April, reaching 2.01 percent on Feb. 1, before falling to 1.88 percent yesterday, Bloomberg data show. Rates have risen from an all-time low of 1.39 percent on July 24.

Several 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 released on Feb. 20.

Fed Divisions

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.

Bernanke defended the central bank’s unprecedented asset purchases yesterday, saying they are supporting the expansion with little risk of inflation or asset-price bubbles.

Dollar-denominated sales have declined to $87.6 billion this month from $148.3 billion in February 2012, Bloomberg data show. As investor sensitivity to interest rates mounts, inflows to bank loan funds reached a record $1.4 billion in the week ended Feb. 13, helping bring the total through the year to $6.9 billion, according to Royal Bank of Scotland Group Plc research.

‘Cautious’ Institutions

“Institutional investors are starting to get very nervous,” Mark Pibl, head of credit strategy at Cortview Capital Securities LLC, said in a telephone interview, referring to the rising rates. “I wouldn’t say institutional money is becoming defensive, I would say they are more cautious.”

The euro area will shrink for two straight years for the first time since the common currency was introduced, the European Commission predicted on Feb. 22, scrapping an earlier growth forecast.

Europe’s iTraxx default-swaps index has climbed 17 basis points since Jan. 21 from 102.1, the least since May 2011.

Cash holdings at the 265 European companies in the Stoxx Europe 600 Index, excluding banks and insurers, have reported 2012 results totaled $475 billion at the end of last year, Bloomberg data show. That compares with $136 billion in 2002 and is 14 percent more than in 2011. Siemens AG, Vodafone Group Plc and Total SA are among nine companies that each held more than $10 billion.

Vodafone Group, the world’s second-largest mobile-phone company, raised $6 billion on Feb. 11 in five parts, Bloomberg data show. The offering from the company included $1.6 billion of 2.95 percent, 10-year securities at a spread of 105 basis points.

“It’s healthy that we have some pullback,” Mizuho’s Cox said. “Nothing goes straight up forever.”