No Sign Of Summer Slump Seen In U.S. Corporate Bond Market
June 02 2011 - 09:48AM
Dow Jones News
U.S. corporate bond borrowing typically slows after Memorial
Day, but the allure of cheap money has already enticed some
companies to borrow aggressively and others are likely to follow
suit.
ING Bank NV, Union Bank (UBSI.AJ) and Applied Materials Inc.
(AMAT) sold a combined $5.25 billion of bonds on Monday.
"Despite the heat wave in the northeast coming to an end, it
looks like there's no cooling off in the credit markets," said Guy
LeBas, chief fixed-income strategist at Janney Montgomery. He
expects elevated issuance volume through the summer months as
companies seek to finance mergers and acquisitions, deal with
maturing debt and refinance to lower borrowing costs.
Applied Materials sold its $1.75 billion offering to partially
fund its merger with Varian Semiconductor Equipment Associates
(VSEA).
Last June, $55 billion in bonds were sold, including $5.6
billion in the first week of the month, data provider Dealogic
said. A poll of New York-based syndicate managers estimated June
supply ranging from $45 to $85 billion.
LeBas said with 10-year Treasury yields hovering around 3%,
"borrowers are apt to be more aggressive in pulling issuance
forward to take advantage of very low financing costs."
Historically low Treasury yields have propelled corporate bond
sales to near record levels, underscored by the $95.8 billion in
new offerings sold in May, according to Dealogic. The drop in
yields translated to cheaper financing for companies, as the price
of corporate bonds is pegged to Treasurys.
"While the markets are concerned that once [a Federal Reserve
economic stimulus program called quantitative easing] comes to an
end Treasury yields will start moving sharply higher, we are not
convinced that that will be the case," analysts at BMO Capital
Markets wrote in a note.
They added that if the Fed stops acquiring Treasurys in the open
market but holds on to the hundreds of billions of dollars worth it
has already bought, interest rates should remain relatively
unchanged. Indeed, rates "should move lower if real growth and
inflation expectations are revised lower."
Still, while many market participants agree that borrowing
opportunity will remain ripe in June, the end of the Federal
Reserve's quantitative-easing program could ease the pace.
"There will be some continued new issuance, but the barn-burning
tempo is likely to be turned down a couple of notches," said Scott
MacDonald, head of credit and economic research at Aladdin Capital
Holdings in Stamford, Conn. He said that the pace of supply will
largely depend on the strength or weakness of the U.S. economy
"over which there are doubts as to the speed going forward."
Dan Flanigan, chairman of the financial-services practice at law
firm Polsinelli Shughart, suggests the end of the quantatitive
easing would likely damp debt sales.
"I don't think we'll see another round of easing, given the
hostile reaction we saw following the QE2 announcement, and that
could put some pressure on corporate borrowers," Flanigan said.
But while the end of QE2 could potentially affect corporate
supply, those with a need to borrow won't be paying exorbitant
costs. Rates likely won't spike overnight.
Strategists at J.P. Morgan think the market is now "at the
bottom end" of a 3% to 3.7% trading range" in which the 10-year
Treasury yield will fluctuate.
They expect the 10-year will soon move to the middle of that
range due to "the end of [quantitative easing], the expected
announcement of a refinancing package for Greece over the next
couple of weeks, and a likely rebound in economic data in 3Q due to
stabilization of energy prices and a rebound in Japan."
-By Kellie Geressy-Nilsen, Dow Jones Newswires; 212-416-2225;
kellie.geressy@dowjones.com
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