By Benjamin Streed
August 13, 2012
Meanwhile, the persistently low yields in the Treasury market prompted a resurgence of corporate borrowing in recent weeks with several well-known issuers even tapping the market for 30-year loans despite not having done so in more than a decade. In fact, issuance of investment-grade bonds with at least 30 years to maturity has totaled nearly $84 billion so far this year, which already exceeds the amounts issued in both 2010 and 2011. Total corporate issuance in 2012 has been a bit of a rollercoaster with 2012 exceeding levels from 2008-2011 through late May before slowing considerably in the summertime. Corporate issuers have taken advantage of record-breaking low Treasury yields seen this summer helping many issuers realize what could be once-in-a-lifetime opportunities to borrow for several decades at the lowest levels in their history. According to Bloomberg data, corporate issuance year-to-date is nearly $870 billion marking the fastest pace on record since data began being collected. The recent surge in longer-dated borrowing has helped push the average life of the Citigroup Broad Investment-grade Corporate Bond Index (Citi BIG Corporate Index) to 10.06 years, edging ever-closer to the record-high of 10.23 years set back in April 2010. Not surprisingly, the average yield on these bonds has dropped to 2.93%, only slightly off its all-time low of 2.882% set on August 2nd while average duration hit 7.125 this month, considerably higher than its long-term average of 6.55. It should come as no surprise to learn that amidst the accommodative borrowing environment total inclusion in the index jumped to $3.552 trillion, roughly 50% higher than the post-crisis levels of 2009 which saw a only $2.36 trillion of similar bonds outstanding. Generally such indices will include any dollar-denominated investment-grade corporate bond issued to the public and available to trade.
Much of the ongoing demand for U.S. Treasuries can once again be attributed to the seemingly unending political and fiscal drama playing out in the Eurozone. Member countries at the forefront of the battle are continuously embattled with political disagreement regarding how the monetary union should proceed with austerity measures for those countries seeking bailout funds from such institutions as the European Financial Stability Mechanism (EFSM) and the European Stability Mechanism (ESM). After spending the last few weeks in the limelight, European Central Bank (ECB) head Mario Draghi will give way to German Chancellor Angela Merkel who will spend time this week to discuss how the Eurozone intends to quarantine its crisis from other economies around the globe. Earlier this month, ECB president Draghi noted that the central bank will purchase European sovereign debt by utilizing both the EFSM and ESM so long as the struggling countries implement responsible budget policies to help pay back any borrowings. Although the plan initially calmed market concerns it has done little in the last few weeks to help the struggling countries of Spain and Italy with their persistently high borrowing costs. 10-year yields for these countries sit at 5.87% and 6.82% respectively while similar maturity U.S. Treasuries, often considered the safest sovereign asset on the planet, currently yield 1.66%. Not helping matters, ECB Governing Council member Luc Coene told two Belgian newspapers last week that, “It makes no sense for the ECB to start financing” Spain and Italy as, “It would only lead to the EBC taking on the whole public debt of Spain and Italy onto its balance sheet”. Luc also mentioned that ECB officials continue to be divided on what conditions should be met by any country looking to utilize the financial stability mechanisms in the central bank’s control and that he is concerned over their potential effectiveness. He stated, “We haven’t forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges. The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act”.
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.