Bloomberg News

Bond Sales Top $1 Trillion on Record-Low Yields

March 29, 2012

Petroleo Brasileiro SA's P-51 oil platform stands in the Marlim Sul field, at the Campos Basin, about 150 kilometers off the coast of the state of Rio de Janeiro, Brazil. Photographer: Rich Press/Bloomberg

Petroleo Brasileiro SA's P-51 oil platform stands in the Marlim Sul field, at the Campos Basin, about 150 kilometers off the coast of the state of Rio de Janeiro, Brazil. Photographer: Rich Press/Bloomberg

Corporate bond sales from the U.S. to Europe and Asia are challenging a first-quarter record set in 2009 with investors willing to lend at unprecedented low rates on signs the global economic recovery is taking hold.

Petroleo Brasileiro SA (PETR4), Brazil’s state-owned oil producer, and London-based SABMiller Plc (SAB) are leading $1.14 trillion of offerings worldwide, approaching the $1.16 trillion sold in the first three months of 2009, data compiled by Bloomberg show. In the U.S., sales soared to a record $427 billion, beating a previous quarterly high set a year ago.

Issuance is surging as Federal Reserve Chairman Ben S. Bernanke holds to his plan to keep interest rates near zero through at least late 2014. While offerings slumped after the first three months of 2010 and 2011, confidence that Europe’s sovereign-debt crisis may be contained has been building since December as the region’s central bank injected more than 1 trillion euros ($1.3 trillion) into the financial system.

“We are extremely encouraged by the current tone of credit markets,” said Brendan Hanley, a New York-based managing director of investment-grade capital markets at Bank of America Corp. (BAC:US), the second-largest underwriter of corporate bonds worldwide. “Events in Europe caused the previous market disruptions. The threat of a repeat appears to have diminished.”

Yields on investment-grade debt in the U.S. declined to a record low 3.4 percent on March 2, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Yields have since climbed to 3.47 percent.

Globally, yields on bonds from the most creditworthy to the neediest have declined to 4.13 percent from last year’s high of 5.08 percent on Oct. 10, Bank of America Merrill Lynch index data show.

‘Smart Guys’

“Corporate treasurers are smart guys,” Kam Tugnait, a managing director at Babson Capital Europe Ltd., said in a telephone interview from London. “In absolute yield terms, they can lock in relatively low rates for seven to 10 years.”

Elsewhere in credit markets, the cost of protecting corporate bonds from default in the U.S. rose for a third day, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, climbing 2.5 basis points to a mid-price of 93.25 basis points as of 11:52 a.m. in New York, according to Markit Group Ltd.

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

Bank of America

The U.S. two-year interest-rate swap spread, a measure of debt market stress, added 1.25 basis points to 24.75 basis points as of 11:53 a.m. in New York, The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Bonds of Charlotte, North Carolina-based Bank of America (BAC:US) are the most actively traded U.S. corporate securities by dealers today, with 82 trades of $1 million or more as of 11:54 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The second-largest U.S. bank by assets sold $1.25 billion of 3.875 percent, five-year debt on March 19.

First-quarter corporate bond offerings have climbed 14.5 percent from $991.5 billion in the corresponding period last year, Bloomberg data show. Sales in the U.S. compare with $397 billion in the first quarter of 2011.

Petrobras, SABMiller

Optimism about the economy being self-sustaining is boosting returns, encouraging investors to accept lower relative yields to provide cash to companies worldwide. Moody’s Investors Service lowered its trailing 12-month speculative-grade default rate forecast on March 8 to 2.6 percent by year-end from a previous estimate of 2.8 percent.

Company bonds have returned 3.85 percent this year, poised for the strongest period since the third quarter of 2010 when the debt gained 4.33 percent, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield Index.

The extra yield investors demand to hold company bonds rather than government debt has declined to 268 basis points from 351 basis points at year-end, according to the index.

Rio De Janeiro-based Petrobras sold $7 billion of bonds on Feb. 1 in the nation’s largest corporate debt offering ever, Bloomberg data show. Demand was so robust that the sale attracted about $25 billion in bids, according to Itau BBA USA Securities, which helped manage the transaction.

Accommodative Policy

SABMiller, the second-biggest brewer in the world, issued $7 billion of notes on Jan. 10 in its first offering in the U.S. since July 2008, Bloomberg data show. The sale included $1 billion of three-year notes with a coupon of 1.85 percent, the lowest on record for the maker of Miller Lite and Peroni beers.

“What we have really seen is a panic to get invested,” Tom Mercein, global head of syndicate and capital markets at Credit Suisse, said in an interview on Bloomberg Television. “The demand side has been very robust.

Borrowers are tapping the bond market after ECB President Mario Draghi staved off a liquidity crunch in the region with the three-year loans. Investor sentiment was further bolstered after Greece’s 130-billion euro bailout in February.

Euro-area finance ministers meeting in Copenhagen on March 30 are likely to increase the ceiling in rescue aid to 940 billion euros, according to an official speaking to reporters in Brussels.

In the U.S., Bernanke said this week that while he’s encouraged by the unemployment rate’s decline to 8.3 percent, continued accommodative monetary policy will be needed to make further progress.

Jobless Rate

The drop in unemployment to a three-year low may reflect “a reversal of the unusually large layoffs that occurred” in 2008 and 2009, and this process may now be over, Bernanke said in a speech on March 26 in Arlington, Virginia.

The U.S. jobless rate may fall to as low as 6 percent by the first half of 2013, a bigger decrease than most economists currently project, according to research from the Federal Reserve Bank of New York.

Confidence among U.S. consumers in March held close to the highest level in a year. The Conference Board’s confidence index dropped to 70.2 from a revised 71.6 reading in February that was higher than initially reported, figures from the New York-based private research group showed.

Reducing Expenses

“The data we have seen coming out of the U.S. has been better than expected,” Babson’s Tugnait said. “We are by no means looking for strong economic growth but a lot of companies since 2008 that have survived, have taken out a lot of costs and have been managing and improving their balance sheet.”

Junk bond sales in the U.S. have soared to an unprecedented $91.6 billion this quarter, compared with $90.2 billion in the first three months of last year, the previous record, Bloomberg data show. LyondellBasell Industries NV (LYB:US), the chemical maker that emerged from bankruptcy in 2010, sold $3 billion of bonds on March 26 to buy back higher-cost debt.

High-yield, high-risk, or junk bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

While the pace of issuance tailed off in each of the past two years, with offerings of $1.24 trillion in the second half of 2011 exceeding the first quarter by 17 percent, conditions may be better this year, Bank of America’s Hanley said in an interview at the lender’s New York office.

“Most economic indicators point to a robust environment for issuance,” he said.

To contact the reporter on this story: Sridhar Natarajan in New York at

To contact the editor responsible for this story: Alan Goldstein at

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Companies Mentioned

  • BAC
    (Bank of America Corp)
    • $17.64 USD
    • 0.11
    • 0.62%
  • LYB
    (LyondellBasell Industries NV)
    • $81.84 USD
    • 2.58
    • 3.15%
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