Corporate Market Takes In Heavy Issuance, Yields At Record Low

Investors turned the risk-switch firmly to the "on" position Tuesday, helping corporate bonds continue to rally even after yields hit record-lows on Monday.

Nineteen of the 20 most actively traded bonds strengthened relative to Treasurys, according to MarketAxess. The list included improvements of between 15 and 20 basis points on intermediate bonds issued by Goldman Sachs Group (GS), Citigroup (C), and AccelorMittal SA.

The CDX North America Investment-Grade Index, a measure of health for the corporate bond market, was on track to finish at its best closing level since July 26, according to Markit. The index improved 1.8% as of late-afternoon trading, putting it at 93.7 basis points.

Riskier assets were rallying as investors anticipate a successful second-round to the European Central Bank's Long-Term Refinancing Operation, which takes place Wednesday. The operation allows banks to post weak collateral in exchange for a three-year loan at 1%. That works to flood the system with liquidity, pushing yields down on bank bonds and sovereign debt, and reducing counter-party risks in the global financial community.

Dan Hannis, corporate bond trader at William Blair & Co., said the market's optimism is evident as corporate bond spreads tighten to multi-month lows and equities hit multi-year highs. But he noted the 10-year Treasury isn't confirming the optimistic sentiment: its yield has fallen to 1.93% from 2.06% a week ago.

"People are willing take risks in credits or equities, but they are going to hedge that in case of a bad LTRO number, with Treasury bonds," Hannis said.

What constitutes a bad LTRO number is open to debate. In the first operation on Dec. 21, the ECB approved EUR489 billion in loans.

If the figure is much smaller in this round, it could indicate banks feel stigmatized by relying on the ECB; if the number is too large, it could indicate banks are fearful about their ability to access funding elsewhere, Hannis said. The market would be comforted by seeing a Goldilocks-figure somewhere between EUR200 billion and EUR800 billion.

Five high-grade issuers were clever enough to float debt in the primary market Tuesday, where investors are most comfortable placing their bets thanks to the better liquidity. New-issues typically offer investors some extra yield, too, called a concession.

Ryan Newth, director of corporate syndicate at SunTrust Robinson Humphrey, said companies exiting the blackout period after releasing full-year earnings are taking advantage of heavy investor demand while they can. "Funds inflows that are coming in have been so massive," he said. "And trading volumes are still fairly low, so the only place to deploy cash is in the new-issue space."

Tuesday's market was led by a $2 billion offering from Deutsche Telekom International Finance. Its two-part private-placement featured $1 billion of five-year notes yielding 1.53 percentage points over Treasurys and $1 billion of 30-year bonds yielding 1.9 points over Treasurys.

Burlington Northern Santa Fe sold a $1.25 billion two-part deal evenly split between 10-year notes that offered 1.15 percentage points over Treasurys and 30-year bonds that offered 1.375 points over Treasurys, while U.S. Bancorp (USB) sold $1 billion of 10-year notes at 1.1 percentage points over the Treasury rate.

Among smaller deals, H.J. Heinz Co. (HNZ) sold $600 million in a two-part deal evenly split between 1.5% coupon, five-year notes priced to yield 1.532%, or 0.70 points over comparable Treasurys, and 2.85% coupon, 10-year notes priced to yield 2.869%, or 0.95 points over Treasurys.

TransCanada Pipelines Ltd., the Calgary natural-gas pipelines company, sold $500 million of three-year notes at 0.60 percentage points over the Treasury rate.

The deals might help break a February record for issuance, but it all depends on what extent companies take advantage of the leap year's extra session on Wednesday. The market took in $5.25 billion Tuesday, which places the month's tally at $90.9 billion on 163 issues, according to Dealogic. The month's record is 2009, when $94.4 billion was sold.

Appetite for corporate bonds helped average yields fall four basis points to a record-smashing 3.30% Monday, according to the Barclays Capital investment-grade index, which goes back to 1973. The prior record was broken twice the week before.

Bank bonds, which carry higher yields than industrial or utility bonds, have improved 0.8 percentage points year-to-date and finished Monday at a yield of 3.76%, the lowest since Aug. 10, 2011.

-By Patrick McGee, Dow Jones Newswires; 212-416-2382; patrick.mcgee@dowjones.com

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