Bond sales hit new record

Bloomberg

Corporate bond sales so far this year have hit $3.9 trillion globally, surpassing 2009s record of $3.89 trillion. Photo: Bloomberg.

Corporate bond sales from the US to Europe and Asia have surpassed 2009’s record to reach $3.9 trillion (R33.5 trillion) this year as borrowing costs plunged to the lowest ever.

Global issuance is up from $3.29 trillion last year and $3.23 trillion in 2010, according to data compiled by Bloomberg.

With central banks holding down benchmark interest rates to prop up the global economy, investors have funnelled an unprecedented $455.7 billion into bond funds this year, according to US-based EPFR Global.

Companies from the riskiest to the most creditworthy have taken advantage of average yields that fell to 3.33 percent earlier this month to lock in lower borrowing costs.

“If you’re looking, as an issuer, to come to market, why wait for next year when there are a variety of unknowns?” Morgan Stanley Smith Barney chief fixed-income strategist Kevin Flanagan said. “Why not take advantage of the rate environment that was very friendly for issuance this year?”

The extra yield that investors demand to own corporate bonds rather than government debt is at 223 basis points, narrowing from 351 at the end of last year, according to Bank of America Merrill Lynch’s global corporate and high yield index.

“This low-rate environment is definitely creating a unique market,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott in Philadelphia. “Investor demand definitely exceeded expectations.”

Global issuance nudged ahead of 2009’s all-time high of $3.89 trillion, when sales were stoked by government guarantees intended to rebuild confidence in the banking system and help the recovery from the worst financial crisis since the Great Depression.

Yields have declined to 3.34 percent, from 4.83 percent at the end of last year and after touching an unprecedented 3.33 percent on December 6, Bank of America Merrill Lynch index data show. Borrowing costs have tumbled from an all-time high of 9.05 percent in October 2008, when credit markets seized in the weeks following the collapse of Lehman Brothers.

The global economy is expected to expand 2.22 percent this year, down from 2.9 percent growth in 2011, according to the average estimate of economists surveyed by Bloomberg.

The US Federal Reserve said last week that it would expand quantitative easing, buying $45bn a month of Treasury securities starting in January. It has held benchmark interest rates at zero to 0.25 percent since December 2008.

European Central Bank (ECB) president Mario Draghi’s unlimited bank-lending programme and pledge this year to do “whatever it takes” to support the euro have also helped stoke corporate bond sales. The ECB held its main interest rate at an all-time low of 0.75 percent on December 6.

“There might have been finally a sea change in attitude with respect to rates,” said Morgan Stanley’s Flanagan.

Investors realised “maybe this is the interest-rate environment going forward, and instead of sitting on cash at zero, I need to move out and try to get some total return”, he said.

Corporate bonds handed investors 11.5 percent returns this year, the most since they returned 20.5 percent in 2009 and following a 4.86 percent gain last year, Bank of America Merrill Lynch index data show.

In the US, issuance reached a record, climbing to $1.45 trillion from $1.13 trillion last year and exceeding the previous all-time high of $1.24 trillion in 2009, Bloomberg data show.

According to data from Moody’s Capital Markets Group, refinancing was listed as a use of proceeds in about 63 percent of investment-grade, dollar-denominated offerings in the third quarter.

“It’s a good, healthy sign to see that type of issuance, and it shows that financial markets are functioning well,” said Anthony Valeri, a market strategist at LPL Financial in San Diego.

A $14.7bn offering from drug and medical-device maker Abbott Laboratories last month was the biggest dollar-denominated sale since February 2009, when Roche Holding issued $16bn of debt.

Intel, the largest semiconductor maker, led issuance this month with $6.2bn of bonds, Bloomberg data show. ConocoPhillips raised $2bn in its first offering since 2009.

“It’s been a real food fight out there in terms of these issues,” said Bonnie Baha, the head of global developed credit at Los Angeles-based DoubleLine Capital.

“You’d have thought at this point it would have slowed down.” – Sarika Gangar from Bloomberg