New Deals Show Corporate Bond Market's Resilience
05/15/2012| 05:25pm US/Eastern
--High-grade bonds continue to roll into U.S. market
--Market absorbs $3 billion for second day, despite broader selloff
--Progress Energy achieves record-low yield in utility sector
(Updated with record-low yield information in 4th-5th paragraph, bond deal information in 6th paragraph.)
By Patrick McGee
Highly rated companies continued to sell bonds at superlow interest rates even as market conditions deteriorated further.
More than $3 billion of new debt hit the high-grade U.S. market Tuesday, led by five companies in the energy and utility sector. The deals were having no problem finding investors despite a continued selloff among riskier assets and more protection-buying in the derivatives market.
Equities fell roughly 1%, bank bonds continued to tumble, and the Markit's CDX North America Investment-Grade Index, a barometer of sentiment based on credit default swaps, weakened 2.2%
But none of that stopped Progress Energy Inc. (>> Progress Energy, Inc.) from issuing $1 billion in a two-part deal of 10- and 30-year first mortgage bonds. They offered respective yields of 2.826% and 4.129%, or spreads of 1.05 and 1.20 points above the comparable Treasury rates.
The 10-year bond represents the lowest-ever yield for a 10-year bond from the utility sector, according to Standard & Poor's LCD. The 30-year yield was within 0.20 point of the all-time low established last November.
Oncor Electric Delivery, a regulated utility in Texas, also sold $900 million in 10-year and 30-year bonds, Talisman Energy Inc. (TLM.T) sold $600 million of 30-year bonds, and Murphy Oil Corp. priced $500 million of 10-year debt.
On Monday, four companies led by Kellogg Co. (K) priced $3.1 billion, putting the market on a path to meet expectations and sell more than $80 billion this month.
The flurry of deals signals the corporate bond market's strength in the face of global headwinds, according to Mark Cernicky, managing director of fixed income at Principal Global Advisors.
"Credit markets have been resilient," he said. He noted mutual funds continue to report inflows, new deals are oversubscribed, and spreads haven't widened out like they did last year.
Cernicky said it would be concerning if the new-issue market dried up, but company treasurers continue to be enticed by low rates and investors aren't in a position to think that bond prices will dip soon.
The new-issue market is particularly enticing for investors needing to add investment-grade bonds to their portfolios, he added, because larger volumes are available than in the secondary market.
"It's a very efficient way to access credit," Cernicky said.
The main deals in Tuesday's market were triple-B and single-A rated, signifying the market is receptive to middle-of-the-road companies.
In the last week, the risk premium demanded by investors purchasing investment-grade bonds has jumped 0.07 percentage point to 1.92, according to Barclays, but average yields have been steady thanks to the rally for safe-haven Treasury debt.
The average yield in the Barclays U.S. investment-grade index finished Monday at 3.26%, just 0.01 point from the all-time low achieved on May 4. The index goes back to 1973.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; email@example.com