2012 continues to be the year of the corporate bond as companies remain both willing and able to take advantage of near record-low borrowing costs. As of October 10th, year-to-date corporate bond issuance in the U.S. stands at $1.182 trillion marking a new all-time record and handily beats the $1.03 trillion raised back in 2009 amidst the full throws of the financial crisis. Not surprisingly, as interest rates continue to be low, concerns over the global economy linger, and we find ourselves with a central bank that has pledged to keep rates low, investment-grade companies are now choosing to go longer in their maturities than ever before. For the sake of context, as of Friday’s close the 30-year Treasury yield stood at 2.832% while the average corporate bond of a similar maturity yielded around 180bp more according to YieldBook data. Going a bit further in detail, average A-rated and BBB-rated corporate bonds have spreads of 112bp and 190bp apiece, down significantly from the 212bp and 276bp seen at the beginning of the year. The month of September alone saw spreads on these two indexes decline to 126bp (-14bp) for the A-rated index and 207bp (-26bp) for the BBB-rated index after only marginal changes for August. Financial spreads continue their noteworthy decline, having now fallen to an average of 161bp, its lowest level since May 2011, after being as high as 366bp this time last year.
The Wall Street Journal recently highlighted that 166 offering totaling $91.9 billion of 30-year bonds have hit the market so far this year, marking a 26% increase from the 145 issues of $73.2 billion sold last year. As a reminder, back on September 13th the Federal Reserve pledged to keep its pro-growth monetary policies in place and reasserted their willingness to keep rates at accommodative levels “through at least 2015”. This reassurance helped push yields lower after the meeting, with the 10-yr benchmark Treasury sinking from 1.88% to nearly 1.60%. As a result of the Fed’s pledge, September was a very busy month for longer-dated corporate issuance as 24 companies issued over $12.3 billion, making it the second busiest month all year. In the article, an analyst at Moody’s Investors Service summarizes the mentality of today’s corporate stewards by stating: “No treasurer or CFO wants to be the one treasurer or CFO who didn’t get cheap long-term money when it was available.” An example of one such offering was United Parcel Service (UPS) who refinanced current 4.50% 5-year debt set to mature next year at a much longer 30-year maturity costing only 3.625% annually. Comcast, who in the past borrowed for 30-years for as much as 6.50-7.00%, jumped in and sold $1 billion worth of bonds for its NBC Universal subsidiary with a much lower rate of 4.45%. Even General Electric (GE), a frequent issuer in the market, chose to sell $2 billion worth of 30-year bonds after having not done so for many years. In fact, a spokesman for GE was quoted in the article as stating their strategy was, “opportunistic in accessing markets and prefunding maturities, particularly with interest rates at historically low levels.” It may depend on how the remainder of earnings season goes, but it will be interesting to see whether this flood of not just new issuance, but long-dated issuance, continues for the remainder of the year.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section ofinvestinginbonds.com, FINRA’s “Smart Bond Investing” section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of emma.msrb.org.