U.S. companies are issuing bonds at the fastest pace ever. Andinvestors say the Federal Reserve's next rate hike may do little tochange that.

Investment-grade companies are on track to complete the busiestfirst quarter for debt sales since at least 1999. Firms from AppleInc. to Morgan Stanley have pushed new issues to more than $360billion so far in 2017, closing in on the previous record of $381billion from 2009, according to data compiled by Bloomberg. Thatputs bond sales 17% ahead of last year's record pace.

Low borrowing costs, rising stock prices, positive economic dataand strong quarterly earnings results have all helped fuel theboom, said Dominic Pappalardo, a money manager at McDonnellInvestment Management, which manages $11.5 billion. The extrayield over Treasuries investors demand to purchase the bondshas reached multi-year lows in recent weeks, even ascompanies such as Delta Air Lines Inc. to Walt Disney Co. havesold more than $77 billion of bonds to investors so far inMarch.

“Until you see anything change from the economics standpoint orthe fundamentals standpoint, I expect corporations to continue toissue for as long as they can at these tight spreads,” Pappalardosaid. “They probably should lock it in while they can.”

High-yield bond offerings have also roared back after a plungein commodity prices muted new issues last year. Junk-ratedcompanies have sold more than $71 billion in 2017 through Monday,compared with $41.7 billion in the first quarter of 2016.

Companies seeking to get ahead of Wednesday's near-certain ratehike from the Federal Reserve and an expected blizzard in theNortheast on Tuesday sold more than $18 billion of bonds Monday,led by an $11 billion offering from Verizon Communications Inc.

Low Cost

Despite the onslaught of supply, investors are asking for just1.16 percentage points more than government debt to holdinvestment-grade bonds, according to Bloomberg Barclays index data.That's down from 1.22 percentage points at the beginning of theyear. High-yield bond spreads have declined to 3.78 percentagepoints above Treasuries, compared with as much as 3.95 percentagepoints in January.

Although the Fed is poised to raise interest rates 0.25percentage point at the conclusion of its March 14 to March 15meeting, a hike of that magnitude is unlikely to deter corporateborrowers, Pappalardo said. Borrowing costs are still low, with theaverage blue-chip company bond yielding 3.48 percent on Friday,Bloomberg Barclays Index data show. That compares with the 30-yearaverage of 5.97 percent.

Still, the Fed's path to raising interest rates is beginning tostoke concerns among some traders. About 40% of investors surveyedby Bank of America Merrill strategists in March now expect that thehiking cycle may send spreads wider, up from 23% in January. Andhalf of the investors called investment-grade spreads overvalued inMarch, compared with 14% in January. Eighty-five percent of junkbond investors said spreads look overvalued.

“We're at this inflection point where spreads probably will notgrind too much tighter,” said Dan Heckman, a fixed-incomestrategist at U.S. Bank Wealth Management, which oversees $139billion. “We've been on this incredible run. I'm not sure we're ata point where the market is compensating investors for all therisk.”

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