Borrowers are offering the biggest concessions since the start of the year to sell new corporate bonds in the U.S. as Europe’s sovereign-debt turmoil intensifies and signs emerge that America’s economy is weakening.
Investment-grade companies paid an average of 21 basis points more in relative yields in the two weeks ended June 1 than investors accepted for their outstanding bonds with similar maturities, according to Barclays Plc data. The level, the highest since reaching 26 basis points in the week ended Jan. 6, has soared from this year’s low of negative 4 in February.
The index, which has declined from a five-month high on June 4, typically falls as investor confidence improves and rises as it deteriorates. 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.
Investors bid for four times the amount of deals on offer in the week ended June 1, an increase from 2.4 when concessions last peaked at similar levels on Jan. 6, according to Barclays.
At the same time, leverage is increasing and yields for speculative-grade borrowers at 8.35 percent as of yesterday, compared with a five-year average of 10.42 percent, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. Yields reached a record low 7.19 percent in May 2011.