Treasury Rally Prolongs Company Long-Bond Boon: Credit MarketsCordell Eddings
Corporate borrowers in the U.S. have boosted the average maturity of their bonds to the most since at least the 1990s as borrowing costs slump, reducing the risk that they will be exposed to a sudden rise in interest rates.
The average 16.4-year maturity last quarter on new corporate bonds tracked by the Securities Industry & Financial Markets Association is up from the average of 10.7 years and the highest in data going back to 1996. American International Group Inc., the insurer that just more than six years ago was the recipient of a $182.3 billion government bailout, raised 40-year debt on Jan. 12 in its longest-dated bond since 2007.
“Companies are getting a great deal right now,” Scott Minerd, who oversees $210 billion as the global chief investment officer at New York-based Guggenheim Partners LLC, said in a telephone interview. “It’s a rare moment in history where we are in an extremely low-yield environment at a time when investors really need it. We should see a flurry of long-term borrowing continue.”
Corporate treasurers have been locking in low rates and reducing the risk of rolling over debt at higher costs by taking advantage of the Federal Reserve’s nearly six-year policy of keeping its benchmark interest rate close to zero. Borrowers may accelerate the issuance of longer-dated bonds after the plunge in yields on 30-year U.S. Treasuries to a record low 2.47 percent today. U.S. government debt serves as a benchmark for corporate bonds.
Treasury yields indicate traders expect the long-term inflation rate to be the lowest since 2009. The difference between yields on 30-year government bonds and debt indexed for changes in the consumer price index, known as the break-even rate, projects annual inflation over the life of the securities of 1.76 percent, down from as much as 2.79 percent in 2011.
Yields on company bonds with maturities of 15 years or more fell to a record low of 4.3 percent today, from as high 9.3 percent in October 2008, Bank of America Merrill Lynch index data going back to 1995 show.
Companies borrowing for longer terms “should alleviate some fears about their exposure to increases in short-term rates,” John Silvia, the chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, wrote in a note to clients. “We expect to see increased long-term debt issuance as the yield curve continues to flatten.”
U.S. investment-grade debt due in 15 years or more has gained 20.4 percent since the start of last year, compared with 9.3 percent for high-grade issues of all maturities, Bank of America Merrill Lynch index data show.
Mutual funds that invest in longer-dated corporate bonds attracted twice as much money as those that focus on shorter-maturity debt, according to data compiled by Bloomberg.
“In this atmosphere, companies that have the appetite and ability to borrow long will find their plates full,” Sean Kurian, a money manager at JPMorgan Asset management in Columbus, Ohio, who advises pension funds, said in a telephone interview.
AIG, based in New York, issued $800 million of 4.375 percent bonds due 2055 to yield 4.4 percent, or about 190 basis points more than longer-dated Treasuries, Bloomberg data show.
Jon Diat, an AIG spokesman, couldn’t immediately comment.
FedEx Corp. sold a bond this month that the shipping firm doesn’t have to repay for 50 years. The Memphis, Tennessee-based company issued $250 million of 4.5 percent notes due February 2065 at a yield spread of 200 basis points, Bloomberg data show. A basis point is 0.01 percentage point.
“Current financing rates are particularly attractive and consistent with long-term investments we are making in the business,” Jess Bunn, a spokesman for FedEx, wrote in an e-mail citing the company’s stake in assets such as aircraft and package-handling facilities.
“Locking in low rates for the long-term helps minimize the cost to fund capital expenses,” he wrote.
The longer the maturity of a bond, the bigger the risk for investors. Duration, a measure of a security’s price sensitivity to yield changes, is the highest on record for investment-grade debt due in 15 years or more, Bank of America Merrill Lynch index data show.
“There is a lot more risk to investors than issuers,” Jim Kochan, the Menomonee Falls, Wisconsin, based chief fixed-income strategist at Wells Fargo Funds Management LLC, said in a telephone interview. “The trade is looking increasingly crowded, and if there is any hint at higher rates we could see a lot of unwinding of the move.”