Morgan Stanley (NYSE:MS)
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High-grade banks, industrial companies and utilities are still finding it advantageous to tap the U.S. debt markets despite a recent jump in Treasury yields pushing borrowing costs higher.
At least eight borrows are on track to sell more than $10 billion of debt Monday, helping to push January to March high-grade issuance to the fourth-busiest quarter on record, according to Dealogic figures going back to 1995.
Corporate-bonds yields fell to a multi-decade low of 3.27% in early March but have since jumped to 3.45%, according to Barclays Capital, after benchmark Treasury yields soared in reaction to last week's upbeat statement from the Federal Reserve.
Climbing borrowing costs threaten to slow the volume of new deals hitting the market, as companies seek to refinance existing debt at cheap levels.
But high-grade volume is off to a robust start Monday as Morgan Stanley (MS) and Bank of America Corp. (BAC), U.K. miner Rio Tinto (RIO), and German car company Volkswagen (VW) all crowd the marketplace with fresh deals.
"In an historical context, rates are still very low and all-in yields are incredibly attractive to issuers, so unless rates materially jump beyond this range we'll see nothing but supply from high-quality issuers," said John Ryan, portfolio manager at DWS Investments.
The jump in rates last week might have actually spurred issuers to accelerate deals rather than wait it out and see rates continue to climb. "That definitely gets people off the fence," Ryan said.
Added Greg Hall, managing director in debt capital markets at Barclays: the sharp sell-off last week "has instilled a greater sense of urgency."
March is historically the most-active month for issuance as corporations like to accomplish their funding needs early in the year, Hall noted. He anticipates roughly $100 billion of high-grade debt this month, just more than the $99 billion issued last month and roughly on par with March 2011.
Volkswagen's four-part, $3.35 billion deal is the largest issue Monday. The deal includes $1.1 billion of floating-rate notes with 18- and 24-month maturities, offering respective yields of 0.60 and 0.75 percentage points over the three-month London interbank offered rate. Its three- and five-year fixed-rate tranches offer 1.13 and 1.33 points over Treasurys, respectively.
The $2.5 billion deal from Rio Tinto Finance includes three-, five-, 10-, and 30-year maturities, with offered spreads to Treasurys of 0.625 points, 0.85 points, 1.20 points, and 1.375 points, respectively.
After 10-year Treasury rates jumped 0.26 percentage points last week, some strategists wondered if bond losses might lead to outflows from retail investors, but so far the higher rates are enticing investors, according to Ryan Newth, syndicate manager at SunTrust Robinson Humphrey.
"New issues are seeing stronger demand now just given the higher yields," he said. "Yield bogeys are more easily met, and that's spurring some of the demand."
For banks, last week's jump in Treasury rates was of no consequence: average yields on bank bonds actually fell 0.06 points to 3.64%, after the Fed released the results of its "stress tests." That's just 0.02 points from the seven-month low reached on March 3, and compares with the 4.91% yield at year-end 2011.
Average spreads on bank bonds also fell to 2.352 percentage points - the lowest since August 5.
Morgan Stanley opted to take advantage of the low rates as it offered $2 billion of five-year notes - its first issue in 2012. It seeks to price the notes at 3.60 percentage points over the Treasury rate.
Outstanding Morgan Stanley paper due 2017 traded at a spread of 3.65 points last week, according to MarketAxess, implying the new deal is coming without the typical "concession" to entice buyers in the primary market.
Similarly, Bank of America Merrill Lynch sought to sell $1.25 billion of five-year notes at 2.75 points over Treasurys, a tighter spread than the 2.79 points that its 2016 bonds offer.
Meantime, Husky Energy (HSECN) sold $500 million of 10-year notes at 3.988%; Sempra Energy's (SRE) unit San Diego Gas & Electric Co. is marketing $250 million of 30-year first-mortgage bonds; Northeast Utilities (NU) plans to price $300 million of 18-month floating-rate notes.
American International Group Inc. (AIG) is also in the market with three- and five-year notes, but a deal size hasn't been determined.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; email@example.com