Quest For Yield Entices Investors To High-Grade Market

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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