Oracle Joins Microsoft Going Long in Bonds as Fed Gets AnxiousCordell Eddings
Corporate America is borrowing long term like never before.
Companies have issued a record $39 billion of bonds in 2015 that mature in more than three decades, more than five times the amount sold in the same period of last year and at a record pace, according to data compiled by Bloomberg. Oracle Corp. and Microsoft Corp. both sold their first 40-year bonds, while Massachusetts Mutual Life Insurance Co. issued securities that won’t come due till 2065.
Treasurers are embracing what may be their last opportunity to lock in cheap long-term funding costs as the Federal Reserve prepares to raise interest rates for the first time since 2006. Yield-starved investors are snapping up the long-dated securities because they offer a record 0.48 percentage point of extra yield over shorter-term debt, even if it means buying bonds that are most vulnerable to losses when rates rise.
“Companies continue to lock in their funds further out the curve, and, why not?” said Joe Mayo, the head of credit research at Conning, a global insurance investment manager with about $92 billion under management. “Yields aren’t terribly compelling, but many investors can’t afford to forgo the income.”
Maturities for bonds issued in 2015 average 16.4 years, what would be the highest on record for a full year, according to data tracked by the Securities Industry & Financial Markets Association. That compares with an average of 10.7 years in data going back to 1996.
The boom in long-term debt comes as global central-bank stimulus pushes yields on more than $2.1 trillion of the world’s sovereign debt below zero, prompting investors to chase the potential returns offered by riskier corporate bonds.
Borrowers have pounced on this demand, issuing $627.2 billion of company securities this year, up 6.57 percent over the same period of 2014, Bloomberg data show in a year where corporate bond sales last year reached a record $1.57 trillion.
“Companies are finding reasons to borrow, and at these attractive rates and terms who can blame them,” said Jim Kochan, chief fixed-income strategist at Wells Fargo Funds Management LLC in Menomonee Falls, Wisconsin.
Oracle sold $10 billion of notes on Tuesday, including $1.25 billion of 4.375 percent securities due in 2055, Bloomberg data show. The software maker issued the notes at a yield of 170 basis points more than similar-maturity Treasuries, 10 basis points less than where the deal was initially marketed. A basis point is 0.01 percentage point.
The bonds have since fallen, falling to 96.89 cents on the dollar, pushing the yield to 4.54 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Microsoft Corp., the world’s largest software maker sold $2.25 billion of 40-year bonds in February with a 4 percent coupon, its first ever note of that maturity, Bloomberg data show. The price of the bond has fallen since then to 93.1 cents on the dollar, pushing the yield on that debt to 4.36 percent.
Previously, similar tech companies “wouldn’t have had access to the long end of the curve, but now it is more acceptable to investors to take the longer-dated money and in exchange pick up extra yield,” said Anne Daley, a New York-based managing director on the investment-grade syndicate desk at Barclays Plc, one of the underwriters of Microsoft’s offering.
At 48 basis points, the extra yield offered by 30-year investment-grade debt over 10-year bonds is the widest on record, according to data compiled by Royal Bank of Scotland Plc.
With yields a fraction of their historical levels, that may not be enough to compensate investors for the risk, according to Wells Fargo’s Kochan. Average yields of 3 percent on U.S. corporate bonds are below the the 10-year average of 4.67 percent.
“The environment is much riskier for investors,” he said. “At these low yield levels it doesn’t take a big move to lock in losses.”
Investment-grade bonds lost 1.36 percent last week as yields rose 13 basis points, the most in nearly two months
Duration, which tracks the sensitivity of bond prices to interest-change changes, is the highest on record for company securities, according to Bank of America Merrill Lynch index data.
That may bode poorly for performance when the Fed starts lifting its benchmark rate. Dollar-denominated bonds due in more than 15 years lost 6.1 percent in 2013 after then-Fed Chairman Ben S. Bernanke began laying out his plans to taper the central bank’s bond purchases is a reminder of that risk.
For now, investors would rather remember the securities’ 16.9 percent gain last year, and are continuing to buy.
“Global QE continues to support the push for yield,” said Tammy Karp, a corporate-bond trader in Los Angeles at TCW Group Inc., which manages about $180 billion of assets. “I don’t expect the supply to slow any time soon.”
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