BLBG: Goldman Sells Bonds as Yields Drop to Lowest in Six Years: Credit Markets
Goldman Sachs Group Inc. and Morgan Stanley led $14.2 billion in U.S. corporate bond sales in the busiest day in almost four months as yields on company debt fell to the lowest in six years.
Goldman Sachs raised $3 billion in a two-part bond offering, its biggest since January 2009, according to data compiled by Bloomberg. Morgan Stanley also issued $3 billion of debt after it reported second-quarter earnings that surpassed analyst estimates.
Companies from Wynn Resorts Ltd. of Las Vegas and oil driller Noble Corp. to Wall Street banks sought lower borrowing costs as yields on U.S. corporate debt declined to 5.104 percent, the least since April 2004. Federal Reserve Chairman Ben S. Bernanke said yesterday the economic outlook is “unusually uncertain” and President Barack Obama signed into law the biggest financial regulatory overhaul since the Great Depression.
“Companies are taking advantage of good earnings reports and extremely attractive borrowing levels,” said James Kochan, chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, which manages $179 billion. “It’s hard to see any factors that would push yields up significantly.”
The extra yield investors demand to own bank bonds instead of Treasuries has fallen 25 basis points this month to 249 basis points, or 2.49 percentage points, Bank of America Merrill Lynch index data show. That’s outpacing the 17 basis-point decline in spreads in the overall U.S. corporate bond market.
‘Extra Juice’
Bank bonds still remain “cheap” even as investors gain confidence the legislation won’t cripple profits at financial companies, said Michael Johnson, chief market strategist at M.S. Howells & Co., a broker dealer in Scottsdale, Arizona.
“There’s been a hangover on the banks and financials for a while, and it just seems as if investors at this point should be looking to pick up some of that extra juice,” Johnson said.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt fell 2 basis points to 185 basis points, the lowest since May 20, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields fell to 3.815 percent from 3.854 percent on July 20.
Credit-Default Swaps
The cost of protecting company debt in the U.S. rose following two days of declines.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.6 basis point to 111.6 basis points, according to index administrator Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings, fell 4.4 to 115.25.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 1 basis point to 126.5 as of 8:27 a.m. in Singapore, snapping three days of declines, Deutsche Bank AG and CMA prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value in exchange for the underlying security 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.
In emerging markets, spreads widened 3 basis points to 308 basis points, the highest this week, according to JPMorgan Chase & Co. index data. The spread has ranged from as low as 229 on April 15 to as high as 359 on May 25.
Fiat, Ford
Fiat SpA, Italy’s biggest carmaker, will get as much as 4 billion euros ($5.2 billion) of loans to finance a spinoff of its industrial businesses.
Fiat said yesterday the board of directors approved the demerger of truck and heavy equipment operations from its car unit into a new company called Fiat Industrial SpA. The automaker said it earned 90 million euros in the second quarter, compared with a 168 million-euro loss a year earlier.
Ford Motor Co. canceled a planned sale of asset-backed debt, the Wall Street Journal reported on its website, citing market participants it didn’t name.
The carmaker scrapped the offering after credit ratings firms banned the use of their debt grades in bond sale documents on concern they will be exposed to new liability under the financial regulation reform bill, the Journal said.
Ford spokesman Mark Truby didn’t immediately respond to a voice mail message left out of business hours by Bloomberg News seeking comment.
Most-Traded Bonds
Morgan Stanley bonds were the most-traded U.S. corporate debt by dealers yesterday, with 253 trades of $1 million or more, followed by Goldman Sachs, with 170, Bloomberg data show. Anadarko Petroleum Corp. had the most active junk bonds with 48 trades. High-yield or junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.
“A lot of people feel that the corporate market is the only place there’s decent value,” said Wells Fargo’s Kochan. “Spreads on bank paper are still pretty wide, so if you’re looking for one area of the U.S. debt market that has value, you’re forced into corporates, and particularly banks and financials.”
The Goldman Sachs offering consisted of $2.25 billion of 5- year, 3.7 percent notes that yield 205 basis points more than similar-maturity Treasuries and $750 million of 10-year, 6 percent debt that priced at a 230 basis-point spread, Bloomberg data show. The 2020 securities are a reopening of a May offering.
Morgan Stanley Offering
Morgan Stanley issued $1.25 billion of 4 percent debt due in 2015 at a spread of 245 basis points and $1.75 billion of 5.5 percent notes maturing in 2020 that pay 270 basis points more than benchmarks, Bloomberg data show.
The New York-based company’s shares surged 6.3 percent, the biggest gain since July 13, 2009, after it posted second-quarter net income of $1.96 billion, or $1.09 a share. Earnings from continuing operations were 80 cents a share, including a 20-cent tax benefit, compared with the 47-cent average estimate of 21 analysts surveyed by Bloomberg.
“The economy still is in a fragile growth stage, so the Federal Reserve is keeping a fairly steep rates curve, which is enabling banks to make money the old fashioned way, to borrow short and lend long,” said Tom Farina, a director at Deutsche Insurance Asset Management in New York, who helps manage $188 billion of assets.
The yield on two-year Treasuries fell to the fourth record low in five days after Bernanke said the Fed is ready to “take further policy actions as needed.”
U.S. corporate bond issuance was the highest since March 23, when borrowers raised $14.4 billion, Bloomberg data show.
Wynn Resorts, billionaire Stephen Wynn’s casino operator, issued $1.32 billion of first mortgage bonds in the company’s biggest debt offering, Bloomberg data show. Geneva-based Noble, the world’s second-largest offshore driller by fleet size, sold $1.25 billion of debt in a three-part offering.
To contact the reporters on this story: Tim Catts in New York at tcatts1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
