BLBG: Bond Slump Masks Demand as Yield Spreads Shrink: Credit Markets
By John Detrixhe
Sept. 15 (Bloomberg) -- The biggest monthly losses for global corporate bonds this year disguise burgeoning demand for debt sold by companies.
While the securities have lost 0.45 percent this month, that’s better than the 1.04 percent drop for government notes around the world. That’s pushed yields to within 1.72 percentage points of government debentures on average, the least since May, according to Bank of America Merrill Lynch index data.
The narrowing gap signals growing confidence in the ability of borrowers from Ford Motor Co. to Rabobank Nederland NV to meet their debt payments amid optimism the economy won’t slide back into recession. JPMorgan Chase & Co., whose fixed-income research group was ranked first in Institutional Investor magazine’s latest survey of U.S. money managers, estimates the corporate-government yield gap will shrink further.
“Credit quality is quite high, cash balances are quite high,” said Matt Toms, head of U.S. public fixed income investments in Atlanta at ING Investment Management, which oversees about $550 billion in assets. Net ratings upgrades “are showing signs of strength, including in the high-yield space.”
Upgrades of speculative-grade U.S. companies are outpacing downgrades, with 171 rating increases compared with 111 reductions in the first eight months, Standard & Poor’s said yesterday in a statement. In August, 21 borrowers were upgraded and 12 downgraded.
Ford Offering
“Reasons for the increase in upgrades include stronger operating performance, repayment of debt, higher profits, and improved credit metrics,” Diane Vazza, S&P’s head of global fixed-income research in New York, said in the release. Credit quality may be stabilizing, with most new issuance going toward refinancing rather than boosting debt loads, S&P said.
Elsewhere in credit markets, Dearborn, Michigan-based Ford’s credit arm led companies offering at least $9.6 billion of dollar-denominated debt yesterday, building on this month’s issuance surge. A benchmark gauge of company credit risk in the U.S. rose after falling for four days.
Ford Motor Credit Co., the second-biggest issuer this year of junk bonds, sold $1 billion of five-year notes at a yield of 5.75 percent, according to data compiled by Bloomberg. Moody’s Investors Service ranks Ford Motor Credit’s unsecured debt Ba3, three steps below investment grade, and has raised the rating three times this year.
“Some investment-grade funds are reaching for yield in what they perceive as a relatively safe name that is on an upgrade trail,” said Greg Petryszyn, a fixed-income analyst at Minneapolis-based Thrivent Financial. “The market is expecting Ford Motor Credit to eventually become investment-grade.”
Rabobank
Rabobank issued 100-year bonds in the first offering of senior debt maturing in a century by a bank. The world’s largest agricultural lender sold $350 million of 5.8 percent, 100-year bonds after initially marketing $250 million.
Rabobank of Utrecht, the Netherlands, sold the notes less than a month after Norfolk Southern Corp. issued $250 million of 100-year bonds in the first sale of debt with that maturity since 2005, the data show.
General Electric Co. bonds were the most actively traded U.S. corporate securities by dealers yesterday, with 346 trades of $1 million or more. Ford was the most active in junk bonds, rated below Baa3 by Moody’s and lower than BBB- by S&P, with 71 trades.
Bondholder Protection
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.05 basis points from a five-week low to a mid-price of 103.67 basis points as of 7 p.m. in New York, according to Markit Group Ltd.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings was little changed at 104.1, Markit prices show. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 1 basis point to 119 basis points today, Barclays Plc prices show.
The indexes typically rise as investor confidence deteriorates and fall 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, and a basis point equals $1,000 annually on a swap protecting $10 million of debt.
In emerging markets, the extra yield investors demand to hold corporate debt rather than government securities rose for a second day, climbing 6 basis points to 285 basis points, or 2.85 percentage points, according to JPMorgan index data. Relative yields have widened 8 basis points this week.
Bond Improvement
Yield premiums on investment-grade corporate bonds worldwide have narrowed 9 basis points this month, while yields rose to 3.533 percent from 3.476 percent, Bank of America Merrill Lynch index data show. Yields reached a low of 3.442 percent on Aug. 24.
Global high-yield spreads have tightened 58 basis points in September to 633 basis points. Yields declined to 8.212 percent from 8.588 percent. Those bonds have returned 1.83 percent this month.
“We still feel favorably inclined toward high yield,” said Lisa Coleman, who oversees $27 billion of assets as managing director and global head of investment-grade credit in New York at JPMorgan Asset Management. The firm favors “the BB sector, capturing those companies, since we’re in a sweet spot in the credit cycle, that benefit from upgrades from high yield into investment grade.”
‘Moderate’ Expansion
U.S. investment-grade company bond spreads may tighten 25 basis points to 140 basis points by year-end as investors increase allocations to funds that specialize in the securities, JPMorgan analysts led by Eric Beinstein wrote in a Sept. 10 note to clients. Absolute yields on the debt may fall to 4 percent from 4.3 percent in September, he said.
“Spreads will grind tighter as supply falls short of demand and investors continue to see the economic environment as favorable” for increased allocation to investment-grade credit, the analysts said.
Europe’s economy may grow almost twice as fast as previously forecast this year with a more “moderate” expansion in the second half, the European Commission said. Sales at U.S. retailers climbed in August for a second consecutive month.
“We will not have a double-dip recession at all,” Warren Buffett, chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., said Sept. 13 in remarks to the Montana Economic Development Summit. “I see our businesses coming back almost across the board.”
Sales Rise
Companies globally sold $106.8 billion of debt last week, the most since the period ended March 12, Bloomberg data show. U.S. issuance this month has reached at least $65.5 billion, a 66 percent increase from the same period last year. Bond funds worldwide had inflows of $1.31 billion, the 15th straight week that cash flowed into the funds, according to Cambridge, Massachusetts-based research firm EPFR Global.
“When we see more positive data coming out on the economic front, Treasury yields tend to rise and corporate bond spreads tend to stay stable, so you get the spread compression,” Coleman said. “The other thing that has been driving and supporting the corporate bond market has been the sheer volume of money coming into the asset class.”
JPMorgan raised its 2010 issuance estimate to $650 billion from a December 2009 projection of $600 billion, the analysts wrote in the Sept. 10 note. Companies have sold $460 billion this year, JPMorgan said.
The firm estimates that companies will redeem $450 billion and tender $40 billion of bonds this year, for net issuance of $160 billion. JPMorgan previously estimated net bond sales of $150 billion not including tender offers.
“Companies are holding very high levels of cash, they’re continuing to de-lever,” Coleman said. “You’ve got what I think is quite a favorable technical in the market that’s developed between supply and demand.”
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
