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A shift in overnight sentiment and waning confidence in the European rescue plan have dashed hopes for a sudden pick-up in corporate bond supply, even as demand from investors and flows into bond funds are increasing.
A strong pipeline of bonds was expected this week and through November after optimism over a resolution of Europe's debt crisis triggered a $17.8 billion burst of investment-grade deals in the U.S. last week. On Thursday alone--the day after investors agreed to take a voluntary 50% write-down on Greek sovereign debt--companies sold $13.7 billion of bonds in the U.S., the most in a day since March 22, according to data provider Dealogic.
But the rally failed to materialize Monday, with one measure of the U.S. corporate bond market's health--the CDX Markit North America Investment-Grade Index--deteriorating 4% from Friday's closing levels.
"You will see some borrowers push forward, but those who saw opportunistic pricing last week and had been planning to come to market may not come this week," said Andrew Karp, managing director and head of investment-grade debt syndicate for the Americas at Bank of America Merrill Lynch.
Last week's burst of issuance lifted the month-to-date total of investment-grade bonds to $44.7 billion, but that is still well behind the same month last year, when companies issued $58.3 billion of bonds.
One of two borrowers marketing high-grade deals Monday was Ruby Pipeline LLC, a joint venture owned by El Paso Corp. (EP) and Global Infrastructure Partners LLC. The $1.075 billion senior unsecured bond offering, which is expected to price this week, and a separate interim project finance loan will help its owners refinance an existing loan used to put the pipeline in service in July.
The second company to brave the U.S. market with a high-grade bond was Air Products & Chemicals Inc. (APD), which intends to use proceeds from its 10-year, $300 million deal for general corporate purposes, a company spokeswoman said.
Other corporate borrowers seem eager to wait out the headline risks stemming from this week's economic data reports and policy meetings by the Federal Open Market Committee, G-20 and European Central Bank, syndicate managers said.
That's despite a huge imbalance in supply and demand as diminished issuance collided with the fact that investors have stashed a record high $704.1 billion into intermediate-term investment-grade corporate bond funds as of the end of September, according to Lipper, a unit of Thomson Reuters.
Together, this has provided for the most favorable issuance conditions in weeks.
The average yield an investor can earn on an investment-grade corporate bond is 3.7%, the lowest it has been all month, and companies themselves are paying just 2 percentage points in interest over what the U.S. government pays on comparable debt, according to Barclays Capital index data. On Oct. 5, the average yield for high-grade corporate debt was 4% and companies paid 2.5 percentage points over Treasurys on average.
Conditions for non-investment-grade or "junk" rated borrowers are even more compelling, with yields falling 2% to 8.1% over the same period, and the price of the average bond rising to 99 cents on the dollar from 91 cents in early October.
"Generally, things feel a lot better" for corporate borrowers, said Karp. "The calendar [of new bond sales] has been very light and investors have been defensive so there is cash built up."
The risk for investors is whether the situation in Europe or other news will cause big price swings in traditionally conservative corporate bonds. That has led bond buyers to scrutinize the performance of recently issued bonds before putting their stockpiled cash to work.
The news has not been good. Some recent deals were little changed as of last week, but others are showing signs of weakness in secondary trading, according to MarketAxess data.
Verizon Communications Inc. (VZ) sold $1.85 billion of 10-year debt and $750 million of 30-year bonds under a four-part deal Thursday. As of Monday mid-morning, the 10 year notes were trading with a risk premium of 1.25 percentage point over U.S. Treasurys, up from 1.2 originally, while the risk premium on the 30 year bonds widened to 1.41 percentage point over Treasurys from 1.375 percentage point on the day of pricing.
Similarly, a $1.35 billion tranche of three-year debt from IBM Corp. (IBM) priced at 0.40 percentage point over Treasurys on Thursday, but is now trading with a risk spread of 0.45. When risk premiums rise, the value of the bond falls.
If deal performance spooks investors, some companies may choose to bring deals next year instead of pushing to come in before Thanksgiving kicks off the traditionally slow holiday season.
-By Katy Burne, Dow Jones Newswires; 212-416-3084; firstname.lastname@example.org