Quest For Yield Entices Investors To High-Grade Market
September 08 2010 - 2:30PM
Dow Jones News
High-grade bond issuance continued at a hectic pace on Wednesday
as issuers and investors found common ground with lower rates and
longer-term notes.
In two straight days, issuance has topped $30 billion, with the
likes of Hewlett Packard Co. (HPQ), Home Depot Inc. (HD), Aon Corp.
(AON), France Telecom (FTE, FTE.FR) and even Freddie Mac (FMCC)
tapping the market. Supply this month could be in the range of $75
billion to $100 billion, akin to the $99 billion sold last year in
September.
Pent-up demand from late August, when several industry
participants take a break, typically makes September an active
calendar month for new issues.
This year in particular, issuers have found this an opportune
time to tap the markets because rates remain low, which provides
them a chance to switch out higher-interest debt for more
attractive rates. Luckily for them, investors are loaded with money
they want to channel in the best-rated bonds.
Issuance is concentrated in the five- to 10-year range, which
offers more lucrative yields than shorter maturities. More than
half of the bonds issued on both Tuesday and Wednesday mature in
five to 10 years.
The chase for higher yields pushed investors out of money-market
funds that have recently offered less than 1% annually. "The trend
was to get out of money markets, then move shorter to the one- to
three-year sector, and now we are seeing an extension of that,"
said Michael Hyman, senior vice president and head of
investment-grade credit at ING Investment Management in
Atlanta.
This surge of interest has allowed bond issuers to offer lower
and lower rates.
"Investors definitely have more money than companies need," said
Patrick Sporl, a senior portfolio manager at American Beacon
Advisors in Fort Worth, Texas.
One measure of investor exuberance is that several of the bonds
are "subject," meaning investors have agreed to buy them even
before the deal is closed. This makes it tougher for portfolio
managers to buy as much debt as they had planned for.
Corporations are using this robust demand to issue new debt
strictly to repay older, costlier debt, not to expand their
businesses.
Goodrich Corp. (GR), for instance, is using the $600 million in
10-year notes it is raising Wednesday to pay down $257.5 million in
outstanding debt remaining on its notes due 2012 with an interest
of 7.625%. This time around, it could pay as little as 3.681%.
The bond, which was increased in size by $100 million, is
scheduled to price later Wednesday.
-By Anusha Shrivastava and Prabha Natarajan, Dow Jones
Newswires; 212-416-2227 or 212-416-2468;
anusha.shrivastava@dowjones.com or
prabha.natarajan@dowjones.com
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