Deluge of Corporate Bond Deals Hits Market
07/10/2012| 10:46am US/Eastern
--Corporate bonds yields at record low 3.16%
--Almost $9 billion of bonds sold in stable market
--Biggest back-to-back issuance sessions in four months
High-grade companies scurried to issue nearly $9 billion of bonds Tuesday to exploit some of the lowest borrowing costs on record.
Tokyo's Sumitomo Mitsui Banking Corp. led the market with a $3 billion bond deal, alongside a $2 billion offering from Chilean state-owned mining company Corporacion Nacional del Cobre de Chile, known as Codelco, and a $1.1 billion deal from Pennsylvania-based Penske Truck Leasing Co.
All are enticed by the same dynamics: low yields and heavy demand.
Barclays's index of corporate bonds hit a record-low yield Monday at 3.16%, a full 0.20 percentage points under the lowest yield heading into 2012. Data goes back to 1973.
"It's very much an issuer's market, rather than an investor's market," said Jody Lurie, corporate credit analyst at Janney Montgomery Scott. "Investors have so much cash .. and new issues are the best option because they are generally the most liquid."
Liquidity refers to how easily an investor can buy and sell bonds in large quantities.
Monday's session, when the market absorbed $6.8 billion of bonds, proved how strong investor reception is. Missouri-based agricultural biotechnology company Monsanto Co. (>> Monsanto Company) even broke a record-low coupon rate when it sold 30-year bonds at a paltry 3.60%, according to data going back to 1995 from Dealogic.
That encouraged issuers to keep the party going Tuesday, helping to create the busiest back-to-back sessions in four months, Dealogic shows.
Sean Simko, head of a fixed-income portfolio management at SEI Investments, said investor appetite "remains robust" as investors increasingly believe that "the low-yield environment is here to stay."
"We are not anticipating yields moving higher in the near future and at this point we feel credit fundamentals remain healthy," he added.
Mr. Simko, whose team manages $7 billion of assets, said he has been purchasing new-issue bonds with a preference for non-financial companies.
Investors who have purchased low-yielding bonds have been generously rewarded this year, as outsized demand has pushed up prices and boosted returns. High-quality corporate bonds have delivered a 5.81% total return this year, beating Treasurys by 2.82 percentage points.
And because Treasury rates are so low, average corporate yields still give investors an extra 1.97 percentage point more than Treasurys, according to Barclays.
Sumitomo Mitsui sold three-, five-, and 10-year bonds at yields of 1.356%, 1.82%, and 3.20%, respectively. Each was sold at a substantially lower cost than a similar offering in January. The five-year bonds gave investors 1.20 percentage points more than Treasurys, for instance, whereas it January the Japanese bank paid a spread of 1.80 percentage points on five-year debt.
Penske sold two-year and 10-year bonds at yields of 2.52% and 4.955%, respectively.
The deal follows Penske's debut offering for $1.75 billion in early May. Chief executive Brian Hard said in May he was "very pleased" with the market's reception and indicated the company would continue to borrow if rates remained attractive. Hard was unavailable to comment Tuesday.
Low yields have enticed companies to borrow nearly $530 billion of high-grade debt so far this year, outpacing the year-to-date 2011 pace of $512 billion, according to Dealogic.
Ms. Lurie said issuance is likely to taper off in coming weeks, however, as companies enter regulatory blackout periods during the second-quarter earnings period, which began this week.
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