Bond Sales Revive, Led by Glaxo

Corporations sold at least $55.1 bln in debt this week.

Bond sales worldwide are reviving from the slowest month of the year as yields on corporate debt decline to the least since 2010.

GlaxoSmithKline Plc’s $5 billion offering, its first dollar-denominated sale in more than four years, led issuance of at least $55.1 billion this week following $45.8 billion in the period ended April 27, according to data compiled by Bloomberg. Stockholm-based Ericsson AB, the biggest maker of mobile phone networks, sold $1 billion of 10-year bonds to refinance existing debt, its first issue in almost three years.

Borrowing costs are declining as investor demand rises amid optimism that the global economy isn’t slowing enough to dent corporate creditworthiness. Some 71 percent of U.S. companies that have reported first-quarter earnings beat analysts’ estimates, data compiled by Bloomberg show. Mutual fund inflows for fixed-income funds globally rose last week to the highest level since March, according to research firm EPFR Global.

“What else can they buy that offers a comparable risk-reward profile?” said Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut. “While many portfolio managers are hardly thrilled with current all-in yields, corporate credit fundamentals are good and default risk is historically low. As long as this remains the case, demand for credit exposure will be strong.”

Yields on company bonds from the most creditworthy to the riskiest declined to 4.092 percent, the lowest level since Nov. 9, 2010, and down from 4.825 percent at year-end, according to the Bank of America Merrill Lynch Global Broad Market Corporate & High Yield Index.

The extra yield investors demand to own the debt rather than government securities has declined to 277 basis points from last month’s high of 285 basis points, index data show. While spreads are down, they’re still above last year’s low of 193 on April 11, 2011.

Elsewhere in credit markets, a benchmark gauge of U.S. company credit risk rose the most in three weeks, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbing by 3.4 basis points to a mid-price of 99.5 basis points as of 12:04 p.m. in New York, according to prices compiled by Bloomberg.

That’s the biggest rise since April 13 for the index, which typically rises as investor confidence deteriorates and falls 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 contract protecting $10 million of debt.

 

Rate Swap Spreads

The U.S. two-year interest-rate swap spread, a measure of bond market stress, rose for a third day, climbing 0.9 basis points to 29.25 basis points as of 12:03 p.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Bonds of ABB Ltd. are the most actively traded U.S. corporate securities by dealers today, with 125 trades of $1 million or more as of 12:05 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. ABB Finance USA sold $2.5 billion of debt yesterday in a three-part offering.

Corporate bond sales are reviving with $45.1 billion of sales in the first three days of May, compared with $34.9 billion a month earlier, Bloomberg data show. Sales in April of $200 billion, less than half the $409 billion sold in March, marked the slowest month since December, when issuance declined to $187.3 billion.

While austerity measures aimed at stemming Europe’s debt crisis have pushed economies from the U.K. to Spain into recession, European Central Bank President Mario Draghi said policy makers still expect a gradual recovery this year.

In the U.S., unemployment fell to a three-year low of 8.1 percent in April, Labor Department figures showed today in Washington. Of the 418 S&P 500 index companies that have reported first-quarter earnings, 295 have beaten analysts’ earnings estimates, Bloomberg data show.

“A lot of the weakness was due to the fact that you had an escalating situation in the European debt crisis,” Hans Mikkelsen, a high-grade credit strategist at Bank of America Merrill Lynch, said in a telephone interview. “At the same time you had significant signs of weakness in U.S. economic data. That has sort of stabilized.”

 

Glaxo Offering

Investors added $4.85 billion to fixed-income mutual funds globally in the week-long period ended April 25, the highest level since the period ended March 14 and more than double the 2012 low of $2 billion posted April 11, according to EPFR data.

GlaxoSmithKline’s sale on May 2, the busiest day in the U.S. corporate bond market in seven weeks, was split between $1 billion of three-year notes and $2 billion each of five- and 10-year debt, Bloomberg data show.

The bonds traded yesterday at tighter spreads relative to Treasuries, with the 2015 maturity yielding 38.1 basis points more than benchmarks after pricing at 45 basis points, data from Bloomberg and Trace show.

“Issuers that are ready to go are taking advantage of better market conditions ahead of Friday’s payroll number,” said Anne Daley, a New York-based managing director on the investment-grade syndicate desk at Barclays Plc, which helped to manage the Glaxo deal. “The large, multi-tranche, multi-billion-dollar deals are going exceptionally well.”

Ericsson’s $1 billion of 10-year, 4.125 percent notes, which priced to yield 225 basis points more than Treasuries on May 2, tightened yesterday to 210.4 basis points, Bloomberg and Trace data show.

Corporate bonds “still stand out head and shoulders among the more defensive, risk-free asset classes,” Thomas Chow, a money manager at Delaware Investments in Philadelphia with about $170 billion under management, said in a telephone interview. “There has just been such deep demand among institutional investors.”

 

 Bloomberg News

 

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