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Bond Sales Falter as Surging Yields Sound Alarm: Credit Markets
2013-02-08 17:02:17.779 GMT
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By Sarika Gangar and John Glover
Feb. 8 (Bloomberg) -- Sales of company bonds from the U.S.
to Europe and Asia stumbled this week, following the busiest ever start to a year, as a surge in yields prompted investors to pull money out of funds that buy the debt.
Companies from Imperial Tobacco Group Plc, the maker of West and Davidoff cigarettes, to cruise operator Carnival Corp.
sold about $51 billion of notes, the least since the first week of 2013 and less than half the $97.7 billion issued in the same period a year ago, according to data compiled by Bloomberg. In January, companies borrowed $424.3 billion.
Debt from the most-creditworthy to the neediest companies is losing its luster after bond buyers lost money in January for the first time in 14 months. Since falling to an unprecedented
3.24 percent near the end of 2012, yields on the notes jumped last month by the most in more than a year, prompting investors to yank $644 million from U.S. high-grade and junk bond funds in the week ended Jan. 30, according to EPFR Global.
"Investors are becoming more discriminating in how they're allocating their risk dollars," Edward Marrinan, a macro credit strategist at RBS Securities, said in a telephone interview from Stamford, Connecticut. "These risks have conspired to dampen the bullishness that defined the first three weeks of trading this year."
February Decline
Yields on corporate bonds rose 12 basis points last month, the biggest increase since a 46 basis point rise in November 2011, and reached 3.40 percent yesterday, Bank of America Merrill Lynch index data show. The premium investors demand over similar-maturity government debt reached 217 basis points.
With the exception of 2012, issuance has dipped in February every year since 1999, Bloomberg data show.
"Typically February is a bit slower," said Geraud Charpin, a fund manager at Bluebay Asset Management in London, which oversees $47 billion. "I don't think the market is closed."
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. dropped, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.9 basis point to a mid-price of 89 basis points at
11:37 a.m. in New York, according to prices compiled by Bloomberg.
Default Swaps
The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 90.3 basis points on Jan. 30, the highest level since Dec. 31.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 2.5 to 115.9.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.11 basis point to 15.73 basis points as of 11:38 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.
Bonds of San Francisco-based Wells Fargo & Co. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 5.2 percent of the volume of dealer trades of $1 million or more, at 11:39 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Sales Fall
Sales have fallen for four straight weeks following an unprecedented $130.8 billion issued in the week ended Jan. 11, Bloomberg data show. Offerings this week fell below the 2012 weekly average of $76 billion.
Imperial raised $2.25 billion in the tobacco manufacturer's first sale of long-term, dollar-denominated debt since 1999. The Bristol, England-based company issued $1.25 billion of 2.05 percent, five-year debt that yielded 120 basis points more than similar-maturity Treasuries and $1 billion of 3.5 percent, 10- year securities with a relative yield of 150 basis points, Bloomberg data show.
Carnival, the world's biggest cruise line operator, raised
$500 million of 1.2 percent, three-year debt at a spread of 80 basis points, Bloomberg data show.
Fund Outflows
Corporate bonds lost 0.42 percent last month, the first decline since November 2011, and have risen 0.1 percent in February, Bank of America Merrill Lynch index data show.
Almost 79 percent of the dollar bonds sold in January by companies from Asia outside Japan lost money by the end of the month, from 1.3 percent a year earlier, Bloomberg data show.
That compares with 52 percent of new European deals and 46 percent in the U.S.
U.S. corporate bond funds recorded outflows of $1.5 billion in the four weeks ended Jan. 30, according to Cambridge, Massachusetts-based EPFR. That compares with inflows of $9.7 billion in the similar period last year.
"It's natural there will be some asset allocation out of certain bond funds," said Matthew Barnes, who manages $151 million of corporate debt at ACPI Investments Ltd. in London.
"The softening of prices so far this year is a healthy thing -- it is improving reinvestment returns."
'Less Attractive'
Cooke Aquaculture Inc., North America's largest Atlantic salmon farmer, tightened protections for investors on its $250 million debut junk bond offering this week, reducing the amount of secured debt that can be incurred among other terms, according to a person with knowledge of the transaction, who asked not to be identified citing lack of authorization to speak publicly.
"There is a window that is opening to give investors some ability to extract more favorable terms from issuers," Marrinan said. "With many believing that valuations are full, the risk- return of high-yield is starting to look less attractive."
High-risk, high-yield bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- at Standard & Poor's.
Global bond prices reached a record-peak of 110.3 cents on the dollar on Nov. 8, compared with a historical average of
101.7 cents, before falling to 108.9 cents yesterday, Bank of America Merrill Lynch index data show.
"Given the volatility of the market there is a tendency for companies to bring forward issuance," said Ben Bennett, head of credit strategy at Legal & General Group Plc in London.
"You don't want people pointing at you and saying you aren't funded, so you crack on and get issuance done early."
For Related News and Information:
Top bond news: TOP BON <GO>
Fixed Income credit monitor: FICM <GO>
New issue monitor: NIM <GO>
Preliminary bonds: PREL <GO>
Global bond sales LEAG611 <GO>
--With assistance from Michael Amato and Charles Mead in New York, Abigail Moses and Hannah Benjamin in London and Rachel Evans in Hong Kong. Editors: John Parry, Faris Khan
To contact the reporters on this story:
Sarika Gangar in New York at +1-212-617-0646 or
[email protected]; John Glover in London at +44-20-7073-3563 or
[email protected]To contact the editors responsible for this story:
Alan Goldstein at +1-212-617-6186 or
[email protected];
Paul Armstrong at +44-20-7330-7185 or
[email protected]