Morgan Stanley Leading Long-Bond Sales to Record: Credit Markets
Sales of longer-term bonds are accelerating at a record pace in the U.S., with corporate borrowers from Morgan Stanley to FedEx Corp. (FDX) each selling 30- year debt for the first time in at least a decade.
Issuance of investment-grade bonds maturing in 30 years or more totals $83.6 billion since year-end, already exceeding the annual total in 2010 and 2011, according to data compiled by Bloomberg. Offerings are growing about six times faster than the overall high-grade market.
Corporate treasurers are exploiting record-low borrowing costs as the Federal Reserve says it will hold its target interest rate at between zero and 0.25 percent through at least late 2014. An average yield of 4.57 percent on investment-grade securities maturing in 15 years or more is lower than the rate borrowers paid in 2009 to raise funds due in one to three years.
“Issuers are viewing it as maybe a once-in-a-lifetime opportunity to fund at the levels that they can in the long end of the curve,” Jonathan Fine, Goldman Sachs Group Inc.’s head of investment-grade syndicate for the Americas in New York, said in a telephone interview. Low Treasury yields are “encouraging issuers to layer in more longer-dated debt,” he said.
While investors’ growing appetite for long bonds is a boon to companies, demand is also helping to send duration, a measure of securities’ price sensitivity to yield changes, to the highest level in almost two decades for all investment-grade debt, Bank of America Merrill Lynch index data show.
“Investing in long-term debt with yields so low carries enhanced risk,” Alan Shepard, an analyst at Madison Investment Holdings Inc., which oversees about $16 billion from Madison, Wisconsin, said in a telephone interview. “There might be some parts of that story that don’t end well for investors. But if you’re a corporate Treasurer, you’re doing what you’ve got to do.”
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. rose, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, adding 0.5 basis point to a mid-price of 102.9 basis points as of 11:39 a.m. in New York, according to prices compiled by Bloomberg.
The measure typically rises as investor confidence deteriorates and falls as it improves. 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.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, decreased 1.22 basis points to 19.91 basis points as of 11:38 a.m. in New York. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.
Bonds of UBS AG are the most actively traded dollar- denominated corporate securities by dealers today, with 65 trades of $1 million or more as of 11:38 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Switzerland’s biggest bank priced $2 billion of 10-year, 7.625 percent notes at par on Aug. 10, Bloomberg data show. The securities rose to 101.2 cents on the dollar as of 11:29 a.m. in New York to yield 7.45 percent, Trace data show.
Sales of longer-dated investment-grade bonds this year through last week rose 63 percent from the same period last year, eclipsing issuance of $82.6 billion in all of 2011 and $77.9 billion in 2010, Bloomberg data show. Offerings of all maturities have climbed 11 percent this year to $660 billion.
U.S. investment-grade debt due in 15 years or later have returned 10.5 percent this year, more than triple the gain of 3 percent by notes due in one to three years, Bank of America Merrill Lynch index data show. The shorter-term obligations have returned 14 percent in the past three years, compared with 51 percent for the longer-term debt.
Morgan Stanley (MS), the lender downgraded two levels to Baa1 by Moody’s in June, raised $2 billion with 6.375 percent notes on July 19, its first fixed-rate 30-year debt since March 2002, Bloomberg data show. On July 24, FedEx, the Memphis, Tennessee- based operator of the biggest cargo airline, issued $500 million of 3.875 percent bonds due in three decades, its first 30-year offering since 1989.
Other companies selling bonds with a minimum 30-year maturity in 2012 include pipeline operator Enterprise Products Partners LP (EPD) with $1.85 billion. Bank of America Corp. (BAC) and Target Corp. (TGT) each issued $1.5 billion of the debt, and PepsiCo Inc. (PEP) sold $1.35 billion, Bloomberg data show.
A May 24 United Technologies Corp. (UTX) offering of $3.5 billion of 4.5 percent bonds due in 2042 “signaled how much appetite there is at the long end of the curve,” Andrew Karp, head of investment-grade syndicate for the Americas at Bank of America Merrill Lynch, said in a telephone interview from New York. The lender helped manage the sale.
The 30-year maturity from the Hartford, Connecticut-based maker of Pratt & Whitney jet engines and Sikorsky helicopters accounted for the largest portion of its $9.8 billion transaction to help finance its acquisition of Goodrich Corp. The bonds have climbed 14.5 cents from the issue price to 113.2 cents on the dollar to yield 3.8 percent as of Aug. 10, Trace data show.
Yields on U.S. corporate debt with maturities of 15 years or longer fell to a record low 4.42 percent on July 25, Bank of America Merrill Lynch index data show. That compared with 1.61 percent that day for debt due in one to three years, which yielded more than 5 percent in July 2009.
“It’s a fantastic time to put on 30-year debt,” said Barbara Mariniello, a managing director in debt capital markets in New York at Barclays Plc, which helped Kraft Foods Inc. (KFT) sell $2 billion of 5 percent, 30-year bonds in May. Lower yields are giving companies “the opportunity to push issuance out the curve as long as possible,” she said.
Corporate borrowing costs are falling to record lows with the U.S. central bank holding interest rates near zero since December 2008 to help spur economic expansion during the longest recession since the Great Depression.
While the economy exited the recession in June 2009, the recovery has faltered. U.S. forecasters have cut their outlook, with the Federal Reserve Bank of Philadelphia estimating gross domestic product will increase at an annual rate of 1.6 percent this quarter, down from the previous estimate of 2.5 percent. The forecasters see GDP expansion of 2.2 percent in 2012, down from 2.3 percent.
Fed Chairman Ben S. Bernanke said in a speech to teachers last week that “our economy is still in a fragile recovery” and the central bank is working to restore normal levels of employment and growth. The Federal Open Market Committee said Aug. 1 that it would provide “additional accommodation” as needed to promote an improved job market.
Prices of longer-maturity bonds are more sensitive to changes in current market yields than shorter-dated debt. An equal rise in borrowing costs cuts more value from longer-dated notes that pay a larger number of coupons.
The influx of long-term debt combined with record-low yields helped pushed average modified duration on U.S. investment-grade obligations to 6.82 years on Aug. 2, the highest level since December 1993, Bank of America Merrill Lynch index data show. The measure is up from 6.3 a year ago.
“Given the fact that you’re starting off with this very low yield, the reduction in price would be quite substantial” if interest rates increased, John Lonski, chief economist at Moody’s Capital Markets Group in New York, said in a telephone interview. “There’s no way in the world that you’re being compensated for that particular risk.”
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