Corporate Bond Sales Falter

Issuance subsides worldwide amid doubts about economy, resurfacing of European debt crisis.

Corporate bond sales worldwide are faltering after setting a record in the first quarter as doubts about the strength of the economic recovery and Europe’s sovereign-debt crisis resurface.

From the U.S. to Europe and Asia, issuance has fallen to the lowest levels of the year in the past two weeks, according to data compiled by Bloomberg. Offerings this month of $87 billion from borrowers led by Deere & Co., the largest maker of agricultural equipment, and Montreal-based Royal Bank of Canada compare with a weekly average of $89.9 billion in the first three months of 2012.

Sales are dwindling even as yields on bonds have fallen almost 1 percentage point from last year’s high of more than 5 percent in October, showing reduced confidence in the global outlook among borrowers. Last week, International Monetary Fund Managing Director Christine Lagarde singled out a worsening of the European debt turmoil as the largest risk to growth, while adding that threats to the economy have diminished.

“You’ve kind of had things turn tail over the last couple of weeks,” said Thomas Chow, a money manager at Delaware Investments in Philadelphia with about $170 billion under management, of which $130 billion is invested in fixed-income assets. “The message is that we’re not out of the woods yet by any means, and that the market continues to find faults and problems with any solution to date that’s been presented.”

Yields on corporate bonds from the riskiest to the most creditworthy declined to 4.17 percent as of April 13, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield index. While that’s down from 5.08 percent on Oct. 10, the average has climbed from 4.12 percent on March 2, the lowest since November 2010.

“Corporations are still in a better position if they have to raise money,” Greg Tornga, head of fixed income at Edge Asset Management in Seattle, which manages about $22 billion, said in a telephone interview. “Corporations have pulled forward their needs for the year and they’ve now run out of demand, but they don’t necessarily need to access the market.”

Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds globally rather than government debentures expanded last week by the most in more than four months. The cost of protecting U.S. company debt from default rose for a second week. Prices on leveraged loans fell and in emerging markets, spreads widened for a fourth week.

 

Spreads Widen

Relative yields on company bonds worldwide rose 6 basis points last week to 207 basis points, or 2.07 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. That’s the biggest rise since spreads widened 18 basis points in the week ended Nov. 25. Yields on the debt fell to 3.39 percent from 3.43 percent on April 5.

The Barclays Capital Global Aggregate Corporate Index has gained 0.02 percent this month, bringing the return for the year to 3.89 percent.

Bonds of Fairfield, Connecticut-based General Electric Co. were the most actively traded dollar-denominated corporate securities by dealers last week, with 449 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbed 1.9 basis points last week to a mid-price of 102.1 basis points, according to Markit Group Ltd. The index has increased from a one-year low of 85.4 on March 19.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 11.6 to 143.8. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan advanced 6 to 170 as of 8:26 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The gauge is on course for its highest close since Feb. 2, according to data provider CMA.

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. A basis point equals $1,000 annually on a swap protecting $10 million of debt.

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index declined 0.19 cent to 93.41 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has dropped from 93.84 on March 28, the highest level since August.

 

Emerging Markets

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

In emerging markets, relative yields increased 12.2 basis points to 360.9 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. Spreads have widened from 315.7 on March 19, the lowest since Aug. 3.

Corporate bond sales are slowing after soaring to a record $1.17 trillion in the first quarter as companies took advantage of the Federal Reserve holding benchmark interest rates near zero and the European Central Bank made more than a trillion euros ($1.3 trillion) available to the financial system with three-year loans to the region’s lenders.

Sales this month have declined 39 percent from $143.5 billion in the same period of 2011, Bloomberg compiled data show. Issuance last week of $46.7 billion followed $40.1 billion in the period ended April 6, the fifth straight week of declines in the longest streak since April 2009.

In the U.S., investment-grade issuance dropped for the second week, plummeting 65 percent from the previous week to $4.9 billion, the lowest level since the end of 2011.

“There certainly has been a decline in general appetite for any sort of risky asset over the last couple of weeks,” Brett Wander, chief investment officer for fixed-income at Charles Schwab Investment Management Inc., which has about $220 billion under management, said in a telephone interview. “There was almost a mini risky-asset euphoria that took place in March. Now, both investors and issuers are taking a deep breath.”

Royal Bank of Canada, the country’s biggest lender, sold C$1.5 billion ($1.5 billion) of 2.58 percent senior unsecured notes due April 2017 on April 10. The securities yield 107 basis points more than government debt of similar maturity.

Moline, Illinois-based Deere’s financing arm, John Deere Capital Corp., sold $1 billion of notes on April 12, split evenly between three- and seven-year maturities, Bloomberg data show. That brings its total borrowing this year to $2.7 billion, or about 44 percent of its 2011 issuance.

 

‘A Big Thundercloud’

Europe’s flaring debt crisis remains the biggest risk to worldwide economic growth as the region’s governments move to increase their defenses, Lagarde said April 12 at the Brookings Institution in Washington. The IMF chief said she’d scale down her request for $600 billion of additional resources even as yields on Spanish bonds approached the level that preceded bailouts of Greece, Ireland and Portugal.

Spain’s 10-year government bonds have jumped more than 60 basis points this month to as high as 6.02 percent.

“Spain is rumbling around in the background like a big thundercloud that’s threatening on the horizon still,” said Norval Loftus, chief investment officer at Allegra Investment Management Ltd. in London. “The deals are becoming more cautious.”

Corporate profit growth stalled in the U.S. last quarter as companies from McDonald’s Corp. to 3M Co. saw gains in the world’s largest economy eroded by Europe’s continuing slump. Earnings at S&P 500 Index companies, excluding financials, are seen gaining 0.6 percent in the first and the second quarter from a year earlier, according to analysts’ estimates compiled by Bloomberg, the slowest growth rate since 2009.

Confidence among U.S. consumers also cooled in April from a one-year high following the slowest month of job growth since October. First-time applications for jobless benefits unexpectedly rose the week ended April 7 to 380,000, after employers added half as many jobs in March compared with February, Labor Department figures showed.

“The recovery in the United States is still filled with questions,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “It really became concerning to the issuers -- they didn’t want to sell bonds into a softer market.”

 

 

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