High-grade companies are preparing to accelerate plans to access the bond markets as Treasury rates have climbed for nine consecutive days, threatening to raise the cost of borrowing.
Corporate bond rates bottomed out at a multi-decade low of 3.27% on March 2, but they have since jumped to 3.50%, their highest since Jan. 25, according to Barclays. For a company borrowing $1 billion over 10 years, that extra 0.23 percentage point translates into roughly $2.3 million in additional annual interest costs.
"If you were thinking about issuing opportunistically, you're probably moving a little more quickly, because rates are going up," said Anne Daley, managing director at Barclays.
The rise in yields is a consequence of company borrowing costs being tethered to Treasury rates, which soared last week when the Federal Reserve released an upbeat assessment of the economy. That hurt the price of corporate bonds, cutting their year-to-date total return to 1.27%, down from 3.16% earlier this month, data from Barclays show.
But quality companies don't have to worry much about investor demand slackening, as other measures suggest conditions are at their healthiest since at least last summer.
The extra yield, or "spread," over Treasurys improved Monday to 1.762 points, the tightest since Aug. 5, and way down from the 2.47-point spread at the start of the year, according to Barclays' investment-grade index. Markit's CDX North America Investment-Grade Index, a proxy for the market's health, advanced 3.8% Tuesday to its best level in more than a year, at 82 basis points.
Both measures suggest investors are stepping into the market, happily gobbling up higher-rates after yields had been stuck in a low and narrow range in recent weeks.
Timothy Cox, executive director of debt capital markets at Mizuho Securities, said some issuers are fearful about missing the low-rates boat, but there is still time. The 3.5% average yield is still 1.19 percentage points lower than the 2008-2011 average, and "concessions"--the extra yield tacked on to new-issues to entice buyers--have been minimal or non-existent recently, suggesting demand is robust.
The bigger threat to financing costs is when the economy gains enough momentum for there to be a larger upward shift in the rates environment, as investors move into equities.
"At some point, supply outstrips demand," Cox said. "That's when issuers may feel they really need to come into the market. But right now we have strong order books, good oversubscription of deals, and that's proof there is a lot of money around to invest in new issues."
Ed Marrinan, strategist at RBS Securities, said some companies are probably pulling forward some deals into March that might have been marketed later if Treasurys hadn't jumped 0.25 percentage point, but market dynamics remain favorable enough that issuers don't need excuses to borrow.
"Issuers are mindful of the change, but it's not the sole catalyst as to why an issuer brought a deal this week or last," he said.
Added Jim Probert, head of Americas investment-grade capital markets at Bank of America Merrill Lynch: "The fixed rate cost of debt continues to be very, very attractive."
Sempra Energy (SRE) enlarged a $350 million offering of five-year notes to $600 million on Tuesday, a day after San Diego Gas & Electric Co., its subsidiary, sold $250 million of 30-year bonds at a cheaper-than-expected rate. But neither deal was moved forward because of rising rates, according to a company spokeswoman.
"We identified it as an attractive time to issue well before" Treasury rates jumped, she said.
Low borrowing rates have motivated companies to issue near-record levels debt this year. The $268 billion of high-grade debt sold through March 19 marks the fourth-busiest quarter on record, according to data provider Dealogic, and there are still nine sessions to go in the period. The record quarter of $348.4 billion was in early 2009.
Tuesday's issuance was light, but syndicate desks say it's common to see some indigestion after such heavy volume. Last week was light too, for instance, but it followed a near-record $42.5 billion issued the week before.
Dealogic counted $84 billion of high-grade issuance as of Monday, suggesting high-grade issuance should have little problem surpassing the $100 billion mark this month, as predicted before rates jumped. In March 2011, $110.5 billion was sold.
For investors, recent bond losses need to be seen in the right context, said David Prothro, portfolio manager of Fidelity Corporate Bond Fund.
"Clearly they have lost some firepower," he said. "But corporate bonds always have a place in a diversified portfolio. They really are the best offset to a down equity market."
Prothro said he isn't worried fixed-income assets will continue to lose value, given that most analysts project struggling economic growth over the next decade.
"We may not be Japan, but we won't produce a lot of growth," he said, "and if that's the scenario, we won't see a significant rise in yields."
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; firstname.lastname@example.org