Corporate bond prices worldwide are poised to set a record aseasy money policies by central banks push investors into riskierinvestments even with the potential for losses at about an all-timehigh.

Bondholders are paying an average of 110.22 cents on the dollarfor the right to receive 100 cents back at maturity plus theinterest from coupon payments, according to Bank of America MerrillLynch's Global Corporate & High Yield Index. At the same time,the so-called effective duration that measures how sensitive bondprices are to changes in yield has jumped, making the securitiesabout the riskiest to hold ever.

Central bank purchases of government bonds to contain borrowingcosts and stimulate economic growth have led investors to pourmoney into the $10 trillion global market for corporate bonds asthey search for yield. Besides betting that interest rates won'trise anytime soon, investors also face increased risk fromrestructurings. Cyprus and the Netherlands imposed losses onbondholders as part of their bank workouts, while a rise inleveraged buyouts globally threatens to trash credit ratings.

“We don't like bonds with prices that move significantly abovepar, especially in financials,” said Chris Bowie, the London-basedhead of credit portfolio management at Ignis Asset Management Ltd.,which oversees about $110 billion. “There's interest-rate risk andon top of that, we're in a world where we've seen depositorhaircuts and bondholder expropriations when things go wrong, aswell as the usual buyouts and mergers.”

For every 50-basis-point jump in yields, prices would drop anaverage 2.85 percent, compared with a low of 2.36 percent inSeptember 2008, according to the average effective duration of theBank of America Merrill Lynch index. Bond prices rose to a record110.28 cents on the dollar in November. In 2009, the securitieswere trading below par.

Investors are paying about 152 cents on the dollar for CitigroupInc.'s $2.5 billion of 8.125 percent debentures that mature in July2039 and 137 pence for Goldman Sachs Group Inc.'s 500 millionpounds ($764 million) of 7.25 percent securities due April 2028,the Bank of America Merrill Lynch index show.

Elsewhere in credit markets, Diageo Plc, the seller of JohnnieWalker Scotch and Crown Royal Canadian whisky, raised $3.25 billionin its first bond offering in almost a year. John Paulson, thehedge-fund manager trying to recover from more than two years oflosses in some of his funds, told investors he likes convertiblebonds. The Depository Trust & Clearing Corp. unveiled a productthat will help participants in the syndicated-loan marketaccurately record the amount allocated to them in a deal.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debtmarket stress, fell for a second day, declining 0.41 basis point to13.15 basis points, the lowest level since Jan. 16. The gaugenarrows when investors favor assets such as corporate bonds andwidens when they seek the perceived safety of governmentsecurities.

The cost of protecting corporate debt from default in the U.S.fell for a fourth day, with the Markit CDX North AmericanInvestment Grade Index, which investors use to hedge against lossesor to speculate on creditworthiness, dropping 0.7 basis point to amid-price of 80 basis points, according to prices compiled byBloomberg. That's the lowest level since March 15.

The Markit iTraxx Europe Index, tied to 125 companies withinvestment-grade ratings, rose 1.2 to 107 as of 10:35 a.m. inLondon. In the Asia-Pacific region, the Markit iTraxx Asia index of40 investment-grade borrowers outside Japan was little changed at111, according to data provider CMA.

The indexes typically fall as investor confidence improves andrise 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.

Bonds of JPMorgan Chase & Co. were the most actively tradeddollar-denominated corporate securities by dealers, accounting for5.4 percent of the volume of dealer trades of $1 million or more,according to Trace, the bond-price reporting system of theFinancial Industry Regulatory Authority. The largest U.S. bank byassets sold $2 billion of 10-year subordinated notes yesterday,according to data compiled by Bloomberg.

Mortgage Debt

Diageo's sale consisted of $750 million of three-year, 0.625percent debt to yield 35 basis points more than similar-maturityTreasuries; $650 million of five-year, 1.125 percent notes at arelative yield of 55 basis points; $1.35 billion of 10-year, 2.625percent securities at a 95 basis-point spread and $500 million of30-year, 3.875 percent debt at 105, Bloomberg data show.

The world's biggest distiller last sold debt in May, raising$2.5 billion in a three-part offering, including $1 billion of2.875 percent, 10-year debentures to yield 107 basis points morethan benchmarks.

Paulson, speaking on a conference call with clients, also saidmortgage-backed securities have been performing well within thefirm's Credit Opportunities Fund, according to a person wholistened and asked not to be identified because the informationisn't public. The strategy is Paulson's biggest with $5.9 billionin assets, according to a letter obtained by Bloomberg News.

The S&P/LSTA U.S. Leveraged Loan 100 Index was littlechanged at 98.49 cents on the dollar. The measure, which tracks the100 largest dollar-denominated first-lien leveraged loans, hasgained 2.6 percent this year.

Leveraged loans and high-yield bonds are rated below Baa3 byMoody's Investors Service and lower than BBB- at S&P.

The DTCC offering comes amid increased use of securityidentifiers through the use of CUSIPs and ISINs in the market forsenior floating-rate debt, and participants are choosing electronicmessaging over facsimile machines to save time as stock, bond andcommodities exchanges have done for years.

“To create liquidity and transparency in the market, you need tohave basic financial infrastructure in place,” Mathew Keshav Lewis,a London-based vice president for DTCC, said in a telephoneinterview. “There is still no central securities repository or abroadly adopted messaging format to standardize communicationbetween agent and lender.”

Rate Risk

There are now 13,347 bonds with a face value of $8.91 trillionincluded in the Bank of America Merrill Lynch Global Corporate& High Yield Index, up from 10,082 issues with a value of $6.21trillion at the end of 2008.

“People are taking on interest-rate risk,” said Robert Smalley,a strategist at UBS AG in Stamford, Connecticut. “Money is stillcoming into fixed income, especially investment grade, but theexpectation, at least until recently, is for rates to move up. In amarket with low yields and tight spreads, a jump in interest rateswill cause pain if you're unhedged.”

Issuance of $1.3 trillion this year of corporate bonds followsan unprecedented $3.97 trillion in 2012, Bloomberg data show. Salesreached $3.94 trillion in 2009, the prior record, as companiesrushed to issue with credit markets thawing.

The prospects for rising rates was dimmed earlier this monthwhen the International Monetary Fund trimmed its 2013 global growthexpectations for a fourth time. The Washington-based fund saidApril 16 it now estimates an expansion this year of 3.3 percent,down from a 3.5 percent forecast in January.

Defaults are low, and are forecast to stay that way, bolsteringinvestor confidence that they will get their money back. The globaldefault rate was 2.4 percent at the end of the first quarter, downfrom 2.8 percent in December, according to Moody's InvestorsService. The firm expects the rate to be 2.8 percent by year-end,it said in a report on April 8. Moody's attributes the “remarkablysteady” rate over the past 12 months to accommodative monetarypolicy and weak growth.

Bonds with the longest maturities are typically priced at thehighest above par. Canada's second-largest wireless carrier, BCEInc., has seen its C$150 million ($146.2 million) of 10 percentnotes due December 2054 rise to 173 Canadian cents on the dollar,while Virginia Electric & Power Co.'s $700 million of 8.875percent debentures maturing November 2038 are at 173 cents,according to the indexes.

Besides interest rates, corporate bond buyers must also contendwith credit risk.

Credit Risk

The Netherlands seized the subordinated bonds of SNS Reaal NV,the country's fourth-largest bank, after nationalizing the lender,whose soured real-estate loans threatened it with collapse. Cypruswiped out bondholders of Cyprus Popular Bank Pcl and will forceuninsured depositors to accept losses as it closes down thecountry's second-largest lender in return for the nation's 10billion-euro ($13 Billion) bailout.

Those events have helped boost the appeal of non-financialcorporate bonds, according to Barnaby Martin, a strategist at Bankof America in London.

“Cyprus was the game changer, it was a very scary policy,” hesaid. “If you try and target bank depositors in a resolution you'regoing to get a reallocation out of banks and into assets such ashigh-grade credit.”

In North America, the value of mergers and acquisitionsannounced year to date is about $300 billion, a 26 percent increasefrom the $238 billion announced in the same period a year ago,Bloomberg data show.

Bonds of H.J. Heinz Co. plunged when Warren Buffett and hispartners announced their $23 billion buyout in February. Thecompany's 6.75 percent securities due March 2032, which traded at123.3 cents on Feb. 11, fell 19.3 cents to as low as 104 cents onFeb. 19 after the bid, Trace prices show.

While individual investors have pulled back frominvestment-grade debt, institutions are still a net 28 percentoverweight, Bank of America's Martin said, citing an investorsurvey published on March 15.

“Our survey is far from suggesting the days of reaching foryield in credit are over,” he said. “Quite the opposite.”

Bloomberg News

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