By Patrick McGee
Corporate bond issuers wasted no time selling bonds while risk assets soared early morning Thursday, and with some of the rally fizzling out by day's end, the strategy looked prescient.
Ford Motor Co. (F) garnered much of the attention as it tapped the investment-grade bond market for the first time since 2005 after officially returning to the high-grade universe last month. But it wasn't the largest deal.
American Express (AXP) sold $2 billion of three-year bonds, some with a fixed-rate yield of 1.757%, and some with a floating rate of 1.40 percentage points over the three-month London Interbank Offered Rate, or Libor.
General Electric Capital Corp. sold $2.25 billion of subordinated "preferred" notes. They offered investors a 7.125% yield for the next 10 years, at which point they convert to perpetual notes with a quarterly dividend, until GE redeems them.
Along with smaller deals from Safeway Inc. (SWY), Viacom (VIA), and others, at least $8.3 billion of high-grade bonds were priced Thursday. That brought weekly volume to around $15 billion, easily surpassing the $10 billion forecasts at the start of the week.
Ford, which received two rating upgrades this quarter, sold $1.5 billion of five-year bonds--its largest deal since April 2010, according to data provider Dealogic--at a yield of 3.008%, or 2.3 percentage points more than the five-year Treasury rate. When it sold five-year bonds in January, it had to pay 4.25%, or 3.54 points more than Treasurys.
The much-lower financing cost reflects the savings Ford can attain now that high-grade investment accounts can own its bonds. Moody's Investors Service upgraded Ford and Ford Motor Credit Corp., which issued the bonds, to investment grade two weeks ago, following a similar move by Fitch Ratings.
"Ford continues to be an improving story and investors want to be in on the action before the opportunity is gone--before the car drives away," said Jody Lurie, corporate credit analyst at Janney Capital Markets.
The flight to safety stemming from renewed turmoil in Europe has created an attractive climate for borrowers to issue bonds, as the Treasury yields their borrowing costs are tethered to have plummeted. For investors, falling Treasury rates makes the extra yield on corporate bonds appear more lucrative: Barclays puts the gap between corporate and Treasury yields at 2.13 percentage points, compared with 1.82 a month ago.
"Issuers are all set to tap the markets, it's just a question of when," Ms. Lurie said. "There are short opportunities, so when the window opens they rush in together."
Issuance had temporarily dried up early in the week after the weak May jobs report and fear about the potential breakup of the euro zone.
"We're in a manic state right now," said Michael Mutti, senior credit strategist at Stifel, Nicolaus Co. "When bad news comes out, everyone runs for the hills, but if there are no bad news items for a few days, corporate bonds get a strong bid."
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