Company bond sales worldwide are on pace for the slowestFebruary since 2008 as the prospect of rising interest rates in theU.S. and persistent recession in Europe quashes the busiest startto a year on record.

“Economic conditions don't warrant necessarily any significantincreases in funding,” Kevin Flanagan, chief fixed- incomestrategist at Morgan Stanley Smith Barney in Purchase, New York,said in a telephone interview. “In terms of balance sheet andliquidity, cash on hand and refunding, the lion's share of all thatbalance sheet repair work has been done.”

Ashland Inc., the biggest producer of specialty paper-makingchemicals, and Newbury, England-based Vodafone Group Plc areleading sales of at least $207.1 billion, down 50 percent from$415.6 billion in February 2012, according to data compiled byBloomberg. Offerings have fallen from an unprecedented $425 billionin January.

Debt maturing in three years accounted for 23.2 percent of U.S.sales this month, the biggest share since March 2011, amid concernborrowing costs may rise as the Federal Reserve signals it may weanthe economy off stimulus measures. In Europe, companies areavoiding the bond market as they accumulate more than three timesthe cash they held a decade ago, with the European Commissionforecasting the euro area will shrink for a second year.

Yields on global corporate bonds from the riskiest to the mostcreditworthy have risen to 3.3 percent as of Feb. 25 from anall-time low of 3.24 percent on Dec. 28, according to the Bank ofAmerica Merrill Lynch Global Corporate & High Yield index. Theextra yield investors demand to own the debt rather than governmentdebentures has narrowed 8 basis points during the same period to211 basis points.

Elsewhere in credit markets, the cost of protecting corporatedebt from default in the U.S. fell, with the Markit CDX NorthAmerican Investment Grade Index, which investors use to hedgeagainst losses or to speculate on creditworthiness, decreasing 1basis point to a mid-price of 88.4 basis points as of 10:54 a.m. inNew York, according to prices compiled by Bloomberg. The measurehas declined from 90.2 basis points on Feb. 25, the highest levelin three weeks.

Swap Spreads

The index typically falls as investor confidence improves andrises as it deteriorates. Credit-default swaps pay the buyer facevalue if a borrower fails to meet its obligations, less the valueof the defaulted debt. A basis point equals $1,000 annually on acontract protecting $10 million of debt.

In London, the Markit iTraxx Europe Index a credit-default swapsbenchmark of 125 companies with investment-grade ratings fell 3.3to 119.1.

The U.S. two-year interest-rate swap spread, a measure of debtmarket stress, rose 0.93 basis point to 15.75 basis points as of10:57 a.m. in New York. The gauge widens when investors seek theperceived safety of government securities and narrows when theyfavor assets such as company debentures.

Bonds of New York-based Goldman Sachs Group Inc. are the mostactively traded dollar-denominated corporate securities by dealerstoday, accounting for 3.1 percent of the volume of dealer trades of$1 million or more, at 11 a.m. in New York, according to Trace, thebond-price reporting system of the Financial Industry RegulatoryAuthority.

February's corporate bond sales have been the slowest since$170.3 billion in the similar period in 2008, Bloomberg data show.Issuance is 30 percent below the $297.9 billion February averagefrom the past five years.

“It's hard to top what happened last February,” Jody Lurie, acorporate credit analyst at Janney Montgomery Scott LLC inPhiladelphia, said in a telephone interview. “There's still demand,but it's a little bit spottier than last year.”

Ashland raised $2.3 billion with senior unsecured notes to payback a portion of its secured loans. The chemicals maker's saleincluded $600 million of 3 percent debt due in 2016 that yields 260basis points more than similar-maturity Treasuries, $650 million of4.75 percent bonds maturing in 2022 with a 290 basis-point spreadand $700 million of five-year bonds with a 3.875 percent couponthat pay 304 more than benchmarks, Bloomberg data show.

Three-Year Debt

Borrowers in the U.S. issued $20.3 billion of debt maturing inabout three years this month, the biggest share since March 2011,when they made up $36.6 billion or 23.5 percent of sales, Bloombergdata show. The share of 30-year debt being sold fell to 5.5 percentfrom 7.7 percent last month.

“We've been on a floater, non-standard tenor tear,” Timothy Cox,executive director of debt capital markets at Mizuho Securities USAInc., said in a telephone interview. “You've had a whole gamut ofspreads and products.”

Benchmark 10-year Treasury yields closed above the 2 percentmark this month for the first time since April, reaching 2.01percent on Feb. 1, before falling to 1.88 percent yesterday,Bloomberg data show. Rates have risen from an all- time low of 1.39percent on July 24.

Several Fed officials “emphasized that the committee should beprepared to vary the pace of asset purchases, either in response tochanges in the economic outlook or as its evaluation of theefficacy and costs of such purchases evolved,” according to theminutes of the Federal Open Market Committee's Jan. 29-30 meetingreleased on Feb. 20.

The minutes showed policy makers were divided about the strategybehind Chairman Ben S. Bernanke's program of buying bonds untilthere is “substantial” improvement in a U.S. labor market burdenedwith 7.9 percent unemployment, with some saying an earlier end topurchases might be needed, and others warning against a prematurewithdrawal of stimulus.

Bernanke defended the central bank's unprecedented assetpurchases yesterday, saying they are supporting the expansion withlittle risk of inflation or asset-price bubbles.

Dollar-denominated sales have declined to $87.6 billion thismonth from $148.3 billion in February 2012, Bloomberg data show. Asinvestor sensitivity to interest rates mounts, inflows to bank loanfunds reached a record $1.4 billion in the week ended Feb. 13,helping bring the total through the year to $6.9 billion, accordingto Royal Bank of Scotland Group Plc research.

“Institutional investors are starting to get very nervous,” MarkPibl, head of credit strategy at Cortview Capital Securities LLC,said in a telephone interview, referring to the rising rates. “Iwouldn't say institutional money is becoming defensive, I would saythey are more cautious.”

The euro area will shrink for two straight years for the firsttime since the common currency was introduced, the EuropeanCommission predicted on Feb. 22, scrapping an earlier growthforecast.

Europe's iTraxx default-swaps index has climbed 17 basis pointssince Jan. 21 from 102.1, the least since May 2011.

Cash holdings at the 265 European companies in the Stoxx Europe600 Index, excluding banks and insurers, have reported 2012 resultstotaled $475 billion at the end of last year, Bloomberg data show.That compares with $136 billion in 2002 and is 14 percent more thanin 2011. Siemens AG, Vodafone Group Plc and Total SA are among ninecompanies that each held more than $10 billion.

Vodafone Group, the world's second-largest mobile-phone company,raised $6 billion on Feb. 11 in five parts, Bloomberg data show.The offering from the company included $1.6 billion of 2.95percent, 10-year securities at a spread of 105 basis points.

“It's healthy that we have some pullback,” Mizuho's Cox said.“Nothing goes straight up forever.”

Bloomberg News

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