High-Grade Corporate-Bond Yields Set New Record Low

05/07/2012| 04:31pm US/Eastern

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--Economic concerns lead investors to seek safety

--Rush to bonds helps companies to cut their borrowing costs

--Investors see good returns, predict further gains

(Adds new issuance, index returns, analyst comments, in the fifth through seventh, and ninth through 11th paragraphs.)

 
   By Patrick McGee 
   Of  
 

Corporate-bond yields are again at levels never seen before.

A rush for safe-haven investments after the weak April U.S. jobs report sent yields in the Barclays U.S. Investment-Grade Index on Friday down 0.03 percentage point to 3.25%, a fresh record low in the index, which dates back to 1973.

Safety-oriented investors seeking higher yields than those offered by Treasurys have been diving into corporate bonds all year, pushing yields down from the 3.80% average on Jan. 1.

According to Lipper, a Thomson Reuters unit, bond mutual funds and exchange-traded funds received $46.9 billion of net inflows in the first four months of this year. In the latest week alone, funds absorbed $1.235 billion of new cash, the third-largest intake ever.

The strong demand spurred a host of high-grade borrowers to issue $24.6 billion of debt in the U.S. last week. Colgate-Palmolive Co. (>> Colgate-Palmolive Company) sold 10-year bonds at 2.30%, matching an all-time low yield, while British health-care company GlaxoSmithKline PLC (GSK, GSK.LN) priced $5 billion in one of the largest deals of 2012.

Investors have been duly rewarded. High-rated corporate bonds have delivered a total return of 3.97% for 2012, versus just 0.32% on Treasurys and 1.40% on mortgage-backed bonds. Total return includes coupon payments as well as capital appreciation.

Investment-grade financial bonds have done even better, giving a total return of 6.72%, the kind of yield one hopes for among "junk"-rated bonds.

But with yields so low, it will be difficult for corporate bonds to keep the rally going, according to strategists at the Royal Bank of Scotland. In a weekly outlook, they noted that average spreads--the extra yield offered over Treasurys--have stalled for investment-grade debt, and high-yield bond spreads are running out of room to improve.

However, the start of this year has been so favorable that, if high-grade bonds simply flat-lined for the next seven months, investors would still receive an outstanding annual return, said Justin D'Ercole, head of Americas investment-grade syndicate at Barclays.

"Issuers and investors are having an easy time meeting in the middle," he said. "Issuers are really happy about the yield they are paying, and investors are really happy about the relative performance these bonds provide."

D'Ercole projected that between $80 billion and $100 billion will be issued this month alone--or more than double the $43 billion counted by data provider Dealogic last month. Issuance was subdued as companies focused on releasing first-quarter earnings.

In addition, the market is showing few signs of waning demand.

Dealogic counted $24.6 billion in high-rated-bond issuance last week, marking the fifth-busiest week of 2012. While Monday's session was somewhat slow after the European election results from the weekend, natural-gas producer Devon Energy Corp. (>> Devon Energy Corporation) saw fit to issue $2.5 billion in a three-part deal of five-, 10-, and 30-year bonds.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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