Record Pace of Bond Sales Cools

Eroding forecasts for economic growth cut into corporate issuance.

Corporate bond sales worldwide have slowed from their record pace in the middle of the month as everyone from the Federal Reserve to the International Monetary Fund cuts forecasts for economic growth.

General Electric Co., SABMiller Plc and Bayerische Motoren Werke AG led $287.8 billion of offerings this month, the slowest start to a year since 2008, Bloomberg data show. As recently as two weeks ago, sales totaled $187.3 billion, the fastest pace for a January on record. Now, sales from the U.S. to Europe to Asia have declined 14 percent from the $335.4 billion raised in the same period a year earlier.

Issuance is dwindling after the IMF lowered its estimate for global growth this year to 3.3 percent on Jan. 24, from a September forecast of 4 percent, citing mounting evidence European debt turmoil will cause damage beyond the continent. Banks from the common currency zone have tapped record amounts of emergency central bank funding, as an alternative to their sales of bonds in the U.S., where total offerings have fallen 28 percent from a year ago.

“The big change is the lack of access to the market for the European banks, which have been non-existent so far,” said Justin D’Ercole, head of investment-grade syndicate for the Americas at Barclays Capital in New York in a telephone interview.

The extra yield investors demand to own investment-grade corporate bonds from the U.S. to Europe to Asia shrank to 236 basis points, or 2.36 percentage points, according to Bank of America Merrill Lynch index data. While that’s the narrowest in almost three months, it’s still 76 basis points wider than a year ago.

In Europe, bond sales have climbed 14 percent this month to 65.4 billion euros in both the region’s common currency and British pounds, Bloomberg data show. Spreads on company debt there have contracted 51 basis points this year to 260 basis points, Bank of America Merrill Lynch’s EMU Corporate Index shows.

“There will probably be a bit of an attitude of ‘print while you can’,” said Alison Murdoch, a credit strategist at Ria Capital in Edinburgh. “Companies can’t assume that markets will remain functional.”


Greek Talks

Elsewhere in credit markets, the cost of insuring against a European sovereign default fell to the lowest in almost two months on speculation talks to restructure Greece’s debt are close to a conclusion. Mortgage bonds rallied for a second day yesterday after Fed Chairman Ben S. Bernanke said the central bank is considering more asset purchases to boost growth.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments fell two basis points to 320.5 as of 11:36 a.m. in London, signaling an improvement in perceptions of credit quality.

Greece its negotiating a voluntary debt exchange with bondholders to stave off a default as it faces 14.5 billion euros ($19 billion) of bonds coming due in March. European Union Economic and Monetary Affairs Commissioner Olli Rehn said in Davos, Switzerland that he expects an agreement will be reached “if not today, then over the weekend.”

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.

Bonds of Charlotte, North Carolina-based Bank of America Corp. were the most actively traded U.S. corporate securities by dealers yesterday, with 178 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Mortgage bonds rallied after Bernanke’s signal he may consider more bond buys after the central bank extended its outlook for low rates.

Yields on government-sponsored Fannie Mae’s current-coupon 30-year fixed-rate mortgage securities, or those trading closest to face value, decreased four basis points to 78 basis points more than 10-year U.S. government debt, the lowest in more than 10 months, Bloomberg data show. Yields fell by the most in three months to a record 2.72 percent.

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index rose for an eighth day to the highest since Aug. 3 yesterday, climbing 0.29 cent to 93.03 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has climbed from 86.96 on Oct. 5, which was the lowest level since December 2009.

Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.


Emerging Markets

In emerging markets, relative yields were unchanged at a seven-week low of 407 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. Spreads have fallen from 490 on Oct. 4.

Company bond sales worldwide through yesterday are the least since $205.8 billion was issued during the same span in 2008, Bloomberg data show. U.S. offerings fell to $103.9 billion this year from $144.9 billion through Jan. 26, 2011.

Fairfield, Connecticut-based General Electric, the world’s largest maker of jet engines, has issued $7.17 billion of debt in currencies including the U.S. dollar, British pound and Swiss franc, Bloomberg data show. SABMiller issued $7 billion of notes in the largest U.S. offering in almost two years.

Company bond sales remain brisk in Europe. Italian oil group Eni SpA was the latest company to raise money today, while Munich-based BMW led issuance this year with $5.22 billion of bonds.

Utrecht, Netherlands-based Rabobank Nederland issued $2.5 billion of five-year notes on Jan. 11 while KfW, the German state-owned development lender has raised $8.75 billion in the only U.S. offerings this year by European financial institutions. Foreign debt issued in the U.S. market is known as Yankee bonds.

“The difference in supply in 2012 compared with 2011 is that a year ago there was a very strong demand for Yankee financial issuers, and there was a lot of issuance to meet that demand,” John Hines, Charlotte, North Carolina-based global head of investment-grade syndicate at Wells Fargo & Co. said in a telephone interview.

The European Central Bank on Dec. 21 lent financial institutions a record 489 billion euros of three-year loans, in a so-called longer-term refinancing operation.


‘Considerable’ Needs

“Financials clearly have considerable funding requirements but the ECB’s longer-term refinancing operation helps significantly there,” Ria Capital’s Murdoch said.

The World Bank reduced its global growth forecast for this year to 2.5 percent, from a June estimate of 3.6 percent, the Washington-based institution said on Jan. 18. It warned that the crisis in Europe and slower growth in developing economies could crimp the world economy further.

Fed policy makers cut their estimate for U.S. growth this year to between 2.2 percent and 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. The world’s largest economy has been “expanding moderately, notwithstanding some slowing in global growth,” they said in a statement released after their meeting ended Jan. 25.

“We’re seeing a maturation of the Fed’s view on the state of the global economy,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York. “There’s been a firming up in their opinion that growth is indeed slowing.”



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