Investment-Grade Issuers Tap Bond Market Ahead Of Fed Meeting

A clutch of high-grade corporate bond issuers re-entered the debt markets Tuesday, led by a $4.5 billion offering from Morgan Stanley (MS) and a $3 billion sale from AT&T Inc. (T), as borrowers look to raise cheap funds ahead of a two-day Federal Reserve monetary policy meeting.

Some volatility is expected to accompany the Fed meeting, which ends Wednesday, said Peter Aherne, head of investment-grade capital markets and syndicate at Citigroup. He added that investors will be watching Fed Chairman Ben Bernanke's subsequent press conference for any changing stance on inflation, which eats into bond's fixed returns over time.

"There is a lot of uncertainty regarding the direction of rates," said Aherne. "There continues to be a healthy debate about the end of QE2"--short for the Fed's $600 billion second round of quantitative easing, which keeps interest rates artificially low and is scheduled to end two months from now.

Low rates also drew a number of speculative-grade, or junk-bond, issuers into the market Tuesday. Building Materials Corp. of America, FelCor Lodging L.P. (FCH), Allison Transmission Inc. and Sanmina-SCI Corp. (SANM) were offering a combined $2.5 billion of bonds.

A key piece of economic data Tuesday helped support Bernanke's case that the run-up in energy and food prices is transitory, and not a lasting problem that warrants an interest-rate hike. The Conference Board's April consumer confidence index improved to 65.4 from 63.8 in March, and inflation expectations for the next year fell to 6.3% from 6.7%.

"With commodity prices racing, they'll be watching for whether [Bernanke] remains dovish or displays a hint of hawkishness," said Jason Rogan, director of U.S. Treasury trading at Guggenheim Partners in New York.

Also driving Tuesday's supply were a spate of recent earnings announcements, taking companies out of black-out periods when they cannot issue debt. That, along with bond offerings postponed by the Easter and Passover holidays and the U.K. royal wedding this Friday, could drive up high-grade issuance in May to $80 billion or more, Aherne said.

That compares with $30.5 billion of U.S. marketed high-grade debt issuance in May 2010, according to data provider Dealogic, and $89.7 billion--excluding government-guaranteed debt--in May 2009.

AT&T is selling $1.75 billion in five-year bonds and $1.25 billion in 10-year bonds, according to a person familiar with the transaction, with proceeds earmarked for general corporate purposes.

The phone company reported first-quarter consolidated revenues of $31.2 billion, up 2.3% on the year-earlier period, and has not been in the U.S. high-grade market since July, when it raised $2.25 billion.

Pricing offered on the five-year piece is 0.97 percentage point over comparable government debt, and 1.15 percentage points over Treasurys on the 10-year piece.

Bank of Montreal (BMO), whose most recent offering was June last year for $1 billion, is selling $1.1 billion in three-year senior unsecured notes. Proceeds will help the company fund its proposed $4.1 billion acquisition of Milwaukee-based regional bank Marshall & Ilsley Corp., announced in December.

The deal is split between a $600 million fixed-rate piece launched at 0.70 percentage point over Treasurys and a $500 million floating-rate piece launched at 0.47 percentage point over the three-month London interbank offered rate, or Libor.

Morgan Stanley's deal comprises $2 billion of two-year floating rate notes and $2.5 billion of five-year fixed-rate notes. The floating-rate notes were launched at 0.98 percentage point over Libor; and the fixed-rate notes at 1.80 percentage points over Treasurys. Earlier price whispers suggested the floater would launch around 1 percentage point over Libor.

Morgan Stanley, which is sole lead on the deal, was last in the high-grade market for $100 million on March 22, but its largest U.S. marketed high-grade bond year to date was a $5.25 billion sale on Jan. 20, according to Dealogic.

Last week, the firm announced a first-quarter profit of $966 million, compared with $1.8 billion for the same quarter a year earlier.

It also announced an agreement to convert outstanding convertible stock held by Mitsubishi UFJ Financial Group Inc. (MTU, 8306.TO) into Morgan Stanley common stock. This will raise Mitsubishi's stake in Morgan Stanley to 22.4% from 21%, enhancing Morgan Stanley's tier one capital--a key measure of a bank's core financial strength.

Also in the market Tuesday was freight car provider TTX Company, with a $150 million 10-year note sale for working capital and equipment acquisitions.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

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