Higher Rates Curb Bond Sales to Slowest First Quarter Since ’11

Corporate bond sales in the U.S. are poised for the slowest first quarter in three years after yields rose on upheaval in emerging markets and global growth concerns, restraining borrowers.

Petroleo Brasileiro SA, the most indebted oil company, and Cisco Systems Inc., the world’s biggest maker of network routers and switches, led offerings of about $405.6 billion for the first quarter through today, the least since $403 billion issued in the similar period of 2011, according to data compiled by Bloomberg.

Turmoil in the currencies and stocks of emerging-market nations and concern that China’s economy is slowing diminished investor demand for riskier assets and curbed corporate debt issuance early in the year. Companies’ need to refinance debt is also waning after taking advantage of near record-low borrowing costs since the financial crisis.

“Interest rates were trading at their highs at the beginning of the year, so that curbed some issuance,” Scott Carmack, a money manager at Portland, Oregon-based Leader Capital Corp., which oversees $1.1 billion in fixed income, said in a telephone interview.

Yields decreased to 3.8 percent yesterday from this year’s high of 4.01 percent on Jan. 3 and compared with a record low of 3.35 percent in May, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index.

“In terms of long-term refinancing, much of that has already been done,” he said. Companies have “done a good job in locking in lower rates.”

Refinancing Debt

The Federal Reserve has funneled more than $3 trillion into the financial system since 2008, pushing U.S. corporate bond yields to unprecedented lows as it spurred the world’s biggest economy out of recession. The amount of debt globally has soared more than 40 percent to $100 trillion since the first signs of the financial crisis, according to the Bank for International Settlements.

The extra yield investors demand to own corporate bonds rather than government debentures decreased to 175 basis points yesterday, the lowest since July 2007 and down from 187 basis points on Dec. 31, Bank of America Merrill Lynch index data show.

After five years of easy-money policy and overnight borrowing rates at about zero, the Fed signaled its benchmark interest rate may rise sooner than expected.

Fed Chair Janet Yellen told reporters last week in her first press conference as head of the central bank that the interval between the end of quantitative easing and the first increase in the fed funds rate might be “around six months.”

‘Opportunistic’ Issuance

“In a rate environment that may be higher, you’ll see more opportunistic companies coming to market,” Carmack said.

The new version of a benchmark measure of corporate credit risk in the U.S., which started trading March 20, decreased.

Series 22 of the Markit CDX North American Investment Grade Index, a credit-default swaps gauge used to hedge against losses or to speculate on creditworthiness, declined 0.5 basis point to 70.5 basis points at 4:22 p.m. in New York, according to prices compiled by Bloomberg.

The swaps gauge typically falls as investor confidence improves and rises as it deteriorates. 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.

Petrobras Offering

Petrobras, as Brazil’s state-run oil company is known, issued $8.5 billion of debt in six parts in the biggest dollar-denominated bond sale since Verizon Communications Inc.’s record $49 billion offering in September, Bloomberg data show.

The Rio de Janeiro-based company’s offering included $2.5 billion of 6.25 percent, 10-year bonds at a relative yield of 350 basis points and $1 billion of 7.25 percent, 30-year debt at 360.

Cisco sold the year’s second-largest dollar-denominated offering on Feb. 24 with $8 billion of securities to help fund share repurchases.

Sales of investment-grade debentures reached $336.8 billion this quarter, compared with $320 billion in the similar period last year, Bloomberg data show. Offerings of speculative-grade bonds reached $68.8 billion for the quarter, compared with $107.3 billion in the same period of 2013.

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

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