Feb 29 (IFR) - Some of the biggest names in corporate America smashed the all-time records for low coupons in February, borrowing money in the capital debt markets at the cheapest rates ever.
In the midst of red-hot demand for corporate bonds, top companies including HJ Heinz, Viacom and IBM priced deals with historically low coupons -- and many believe the run is far from over.
Investors have been pouring money into bond funds for more than two months, and fund managers who can’t or don’t buy junk bonds have been forced to take up the low-coupon deals due to a lack of investment-grade alternatives offering higher yields.
“Most of the fixed-income market are relative value investors and benchmarked against indexes, which forces us to play along,” said James Lee, a senior analyst at Calvert Investments.
“You also have the deep-pocketed institutional investors who have constant streams of cash coming in that they have to put somewhere,” Lee said.
Heinz, Viacom and IBM all saw their bond offers heavily oversubscribed in a market fuelled by the quantitative easing measures adopted by the Fed.
The Fed’s loose monetary policy has driven yields on Treasuries so low that even the most conservative investors are pulling their money out of T-bills and putting them in the next safest thing: high-quality investment-grade corporate bonds.
The result? Record low coupons -- that is, the rate that bond issuers pay to borrow money -- as well as record deal volumes, with investors clamoring for issue after issue.
More than $97bn of investment-grade bonds were priced in February -- the highest total ever for the shortest month of the year.
“Look at where Treasuries are. People have to put their money to work somewhere, and even at a coupon of 1.5% you are better off,” said Bonnie Baha, senior portfolio manager at DoubleLine Capital in Los Angeles.
“What is the alternative -- sitting in cash earning worse than zero in real terms?”
Heinz was deluged with $6bn in orders for its $600m offering of five and 10-year bonds this week -- a tenfold oversubscription.
That allowed the global food giant to price $300m of five-year notes with a record 1.5% coupon on a five-year triple-B rated bond -- a rate so low that investors were essentially taking on an asset that won’t even keep up with inflation.
The company also set the all-time mark for the lowest-ever triple-B coupon on a 10-year bond with its $300m 2.85% note issue.
Media conglomerate Viacom set a new record low for three-year triple-B coupons the previous week with its 1.25% 2015s.
That deal broke the record held by Freeport McMoRan’s 1.40% 2/13/15 bonds, which were issued earlier in the month.
Even the ongoing uncertainty about a Greek default failed to stem the demand, as records were shattered across the spectrum all month long.
CSX Corp grabbed the top spot in the 30-year lowest-ever coupon race for a triple-B issuer with its 4.40% 3/1/43s.
On February 1, IBM broke the record for the lowest three-year coupon on any corporate bond, regardless of rating, when it priced a bond maturing in 2015 with a coupon of 0.55%.
On the same day, Procter & Gamble Co topped the 10-year table for lowest-ever coupon with its 2.30% 2022s.
Less than 24 hours later, McDonald’s Corp took top honors for lowest-ever coupon on a 30-year bond with its 3.70% due 2/15/42.
Walt Disney Co then set a new five-year coupon record with a 1.125% coupon a week later.
If the feeding frenzy continues, as everyone seems to think it will, then it’s possible those new records will be shattered as well.
“It can go on until we have bad news,” said Calvert’s Lee. “At least for now, I think the broad market is acting as if the key problems have been solved and that Greece is last year’s story.”
At least for now, the fact that some of these bond issues are at levels that offer negative real rates of return doesn’t seem to be putting off investors.
Unlike other investment-grade buyers who can also buy junk bonds, for example, DoubleLine’s Baha is underweight high-yield bonds -- preferring the less risky option instead.
For her, the safety of an H.J. Heinz, even at 1.5%, speaks volumes in a market where Mideast tensions, high oil prices and the threat of defaults in Europe are still major uncertainties.
“Investment-grade bonds might not be giving huge returns, but it’s a decent return, given where Treasuries are, and at least you can sleep at night,” she said.
Many investors and market participants expect spreads to continue tightening, even though investment-grade yields on the Barclays Capital Investment grade corporate index hit a new low on Wednesday of 3.28%.
“I think it’s very possible that investment grade yields fall below 3.00%,” said Edward Marrinan, chief credit strategist at Royal Bank of Scotland in Connecticut.
In the past, large institutional investors’ need to get a certain level of yield -- to match insurance policy costs, for instance -- would help provide something of a floor to yield levels.
But now it appears that cash inflows have been so great that yield bogies of some insurance companies and other yield sensitive investors are eroding.
In a recent report, Barclays strategists pointed to a change in the sensitivity to yields by some life insurers, which was reflected in a basic lack of any steepening, or significant growth in the yield difference, in the 10-year and 30-year part of the yield curve for non-financial investment-grade corporate bonds.
“We find the lack of steepening in the 10s-30s curve somewhat surprising in light of the significant drop in Treasury yields,” the report said.
“One explanation for this change is that certain yield-sensitive buyers, such as life insurers, have begun to adjust to the lower yield environment,” it said.
Normally, credit spreads would widen to compensate investors for the tightening in the Treasury yield portion of a corporate bond yield.
But as happened in Japan, when it adopted its zero interest-rate policy in 1999-2000, corporate spreads have instead tightened -- even while Treasury yields on the 10-year are down by more than 130bp since January 2011.
RBS’s Marrinan cited “the real-time effects of the Fed’s low interest rate policy”, and said investors would eventually turn back to asset classes offering better returns.
“There will be instances of pushback, where investors will get to a point where they don’t want to hold a bond because the risk/reward doesn’t make sense,” he said.
“But we are not at that point yet.”
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