March 19 (Bloomberg) -- Financial company bonds are beating industrial debt by the most this year after lagging behind in February, encouraging investors to snap up new issues from JPMorgan Chase & Co. and Credit Suisse Group AG.
Debt sold by banks, insurers and brokers returned 0.81 percent this month through yesterday, compared with 0.4 percent for the rest of the market, according to Bank of America Merrill Lynch index data. The cost to borrow for banks is the lowest since February 2008, with yields falling to within 1.93 percentage points of Treasuries on March 18.
Bond sales yesterday by JPMorgan, the second-largest U.S. bank by assets, and Zurich-based Credit Suisse drove global financial debt issuance this month to at least $120 billion, surpassing February’s total by 21 percent, according to data compiled by Bloomberg. The MSCI World index of stocks shows financial company earnings exceeding economists’ estimates by an average 13 percent this year.
“Very few people are underweight banks and finance right now,” said Brian Machan, a money manager at Aviva Investors North America with more than $50 billion of assets under management in Des Moines, Iowa. Given the demand, “why not come to market?” he said.
Elsewhere in credit markets, the extra yield investors demand for corporate rather than government bonds fell to 1.55 percentage points, the lowest since 2007, the Bank of America Global Broad Market Corporate Bond Index shows. Average yields yesterday rose 1.3 basis points to 3.976 percent.
Commercial Paper Declines
The Federal Home Loan Bank system, the 12 government- chartered cooperatives owned by U.S. financial companies, sold $3 billion of 2-year global notes, according to a statement from its finance office in Reston, Virginia. The bonds priced to yield 21 basis points more than similar-maturity Treasuries. Its last sale of benchmark 2-year notes in November was issued at a spread of 29 basis points.
Holdings of agency securities of official foreign institutions such as central banks climbed $3 billion last week, the most this year, to $770.9 billion, according to Federal Reserve data.
U.S. commercial paper outstanding fell to the lowest in eight weeks, the Fed said on its Web site. The market for short- term IOUs declined $22.4 billion to $1.12 trillion in the week ended March 17, the least since the period ended Jan. 20, according to data compiled by Bloomberg.
A unit of Avis Budget Group Inc. sold $580 million of bonds backed by rental-car debt, according to a person familiar with the offering. A $400 million top-rated portion, priced to yield 2.1 percentage points more than the benchmark swaps rate, said the person, who declined to be identified because terms aren’t public. The sale was the first by Avis since the Fed’s Term Asset-Backed Securities Loan Facility ended this month.
Bondholder Protection
National Bank of Abu Dhabi PJSC plans to sell bonds, according to a person familiar with the matter. A deal would make NBAD the first United Arab Emirates borrower to tap capital markets since state-owned Dubai World said last year it was seeking to restructure $26 billion of debt.
The U.S. economy is expanding without a pickup in inflation that would require the Fed to raise interest rates, reports yesterday indicated. Consumer prices were unchanged in February, the first time they didn’t increase since March 2009, Labor Department figures showed in Washington. The index of leading indicators rose 0.1 percent last month, the 11th straight gain, according to the Conference Board, a New York research group.
Credit-Default Swaps
A benchmark measure of corporate credit risk in the U.S. rose from a two-month low. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt, climbed 1.5 basis point to a mid-price of 84 basis points, according to Markit Group Ltd. The index typically increases as investor confidence deteriorates and falls as it improves.
In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 2.75 basis points to 76.25, JPMorgan prices show.
Credit-default swaps on Greek sovereign debt rose to the highest in almost three weeks as an aid plan for the nation’s debt crisis appeared to be unraveling. Prime Minister George Papandreou set a one-week deadline for the European Union to resolve internal disagreement and formulate an aid package.
Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting $10 million of debt.
Global financial issuance in March compares with $99 billion in all of February, Bloomberg data show.
‘Look Attractive’
Average spreads on financial issuers’ bonds dropped 18 basis points this month to 193 basis points as of yesterday, compared with a premium of 130 basis points on bonds from industrial companies, the indexes show.
Financial-company bonds returned 0.28 percent in February, compared with 0.49 percent for industrial debt, according to Bank of America index data.
“Bank bond yields versus industrials look attractive,” said Andreas Fischer, a money manager at London & Capital Group Ltd. in London, which has $3 billion of assets under management. “Banks are also benefiting from the recent rebound in profits.”
JPMorgan raised $2.75 billion in its biggest offering since April 2009, according to Bloomberg data. The sale included $1.25 billion in an add-on to its 3.7 percent notes due in 2015 that priced to yield 110 basis points more than Treasuries. The debt traded on March 17 at 101.9 cents on the dollar, with a spread of 89.9 basis points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit Suisse
New York-based JPMorgan also issued $1.5 billion of 4.95 percent bonds due in 2020 priced to yield a spread of 127.5 basis points.
Credit Suisse’s New York branch issued $1.5 billion of 3.5 percent, 5-year notes that yield 112.5 basis points over Treasuries, its first benchmark deal in the currency since Jan. 11, Bloomberg data show. Switzerland’s largest bank by market value last issued 5-year debt in dollars in April 2009, paying 362.5 basis points more than government securities.
Pohjola Bank Oyj sold 750 million euros ($1 billion) of five-year bonds in its first benchmark fixed-rate note sale since May 2009. The Helsinki-based bank priced the notes at 78 basis points more than midswaps.
Greece’s Budget Crisis
Lloyds TSB Bank Plc, Britain’s biggest mortgage provider, sold 1.5 billion euros of subordinated debt March 17 as Standard & Poor’s said bad loans will hurt the lender’s earning for the next two years. The so-called lower Tier 2 notes were priced to yield 325 basis points over swaps, according to Bloomberg data.
Nordea Bank AB, the Nordic region’s largest lender, also issued 1 billion euros of 10-year junior bonds on March 17, with a spread of 123 basis points, Bloomberg data show.
Financial company bonds slowed in early February amid concern Greece’s struggle to contain the largest budget deficit in the European Union would prompt a regional debt crisis. The global market picked up again later in the month after Prime Minister George Papandreou promised spending cuts of as much as 4.8 billion euros and the nation was able to use the capital markets to raise 5 billion of new 10-year bonds.
Papandreou challenged Germany to drop its doubts about a financial rescue package from the European Union after Chancellor Angela Merkel ruled out “overly hasty” aid pledges, and said he may turn to the International Monetary Fund.
To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net
