Treasuries Get Crowded Out as Corporate Bonds Inundate Investors

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The way Treasury yields are rising, you’d think the economy was booming and Federal Reserve policy makers were on course to jack up interest rates as soon as next week.

It’s not, and they aren’t.

Instead, it’s a record wave of company borrowing that’s stoking competition for investor cash and helping to push U.S. government yields to eight-month highs. For while economic data remains tepid and market speculation has the Fed holding rates steady through September, companies like Qualcomm Inc. and Apple Inc. are racing to lock in historically low borrowing costs.

“The substantial supply available for investment has crowded out Treasuries, and other assets too,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “It’s forced yields higher, and likely more is coming ahead of likely interest-rate increases.”

U.S companies have sold an unprecedented $890 billion in debt this year, 10 percent more than at this point in 2014, when a record $1.57 trillion in debt sold. Since an investor buying corporate debt typically sells some Treasuries or Treasury futures in order to bring its interest-rate risk back to its benchmark, that puts upward pressure on yields on U.S. government securities.

Buybacks, Acquisitions

The yield on the benchmark 10-year note fell to 2.35 percent Friday after it touched 2.4985 percent Thursday, the highest level since Oct. 1 and up from a 2015 low of 1.64 percent in January, according to Bloomberg Bond Trader prices. The average is 3.22 percent over the past decade.

The Fed’s stimulus is aimed at encouraging companies to borrow and invest in their operations. And while its getting the borrowing, much of the cash is going instead to fund share buybacks and acquisitions that help support stock prices and keep equity holders happy.

The sluggish economy has made it more difficult for companies to thrive as consumers have been reluctant to spend, slowing the pace of growth below forecaster expectations. The Commerce Department said June 11 that retail sales rose 1.2 percent in May, the first time this year that the data met projections.

‘Real Investment’

“Investors and the Fed would would like to see more real investment, instead of buybacks and other financial engineering, before yields take off,” said Jack Flaherty, a money manager at New York-based GAM USA Inc., which oversees $17 billion, said in a telephone interview. “A lack of spending on new projects is a reflection that, while the economy is growing, we are still not out of the woods.”

Buyback plans are on pace to reach $1.1 trillion, above the peak of $863 billion in repurchase announcements in 2007, according to data compiled by Rob Leiphart at Birinyi Associates.

American companies across all industries were targeted in a record $215 billion of acquisitions during May, according to data compiled by Bloomberg. That also capped their busiest 12-month period for deals ever at about $1.58 trillion. Charter Communications Inc. and CVS Health Corp. are among companies expected to sell bonds to raise money for recently announced acquisitions.

In the week ended May 1, the 10-year Treasury yield jumped

0.20 percentage point, the biggest gain in eight weeks, as Oracle Corp. and Amgen Inc. sold bonds.

“There are a number of things happening” that have pushed yields higher, said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “Part of it is clearly a concession for the corporate and government supply that’s coming.”