By Patrick McGee
The corporate-bond market heated up Tuesday as markets showed
signs of stabilization.
Issuers were enticed by some of the lowest financing costs on
record, while investors continue to put money to work in high-grade
bonds perceived as offering an attractive mix of relative yield and
safety.
FedEx Corp. (FDX) sold $1 billion in a two-part deal--its first
U.S. debt offering in more than three years--while Norwegian
oilfield-services company Schlumberger Ltd. (SLB) sold $2 billion
in a three-part deal.
The moderately active session followed a session of no issuance
Monday, when bonds and equity sold off as conditions in Spain and
Italy worsened. But the recent rally in Treasurys has helped push
corporate-financing costs to all-time lows in recent weeks, so days
of stability can be ideal times for companies to borrow.
The deals may have been priced in the nick of time. Just as
equities tumbled in late trading, Markit's CDX North America
Investment Grade index, a proxy for risk in the corporate-bond
market, weakened nearly 3% in late trading.
FedEx priced $500 million of 2.625% coupon, 10-year bonds at a
yield of 2.654%, or 1.25 percentage points more than Treasurys, and
$500 million of 3.875% coupon bonds at a yield of 3.968%, or 1.50
points over Treasurys.
When FedEx last priced 10-year bonds, in January 2009, it paid
an 8% coupon, according to Dealogic, underscoring just how much the
savings can be to borrowers in this low-yield environment. The
10-year and 30-year coupons were each record lows for
triple-B-rated bonds, according to Dealogic.
Schlumberger priced $1 billion of five-year bonds at 0.72
percentage point over Treasurys, and $1 billion of 10-year bonds at
1.02 point over Treasurys. The bonds yielded 1.269% and 2.419%,
respectively.
More deals could have been expected were it not for the
earnings-related blackout period that prevents many issuers from
selling bonds.
In secondary trading, six of the 10 most actively traded bonds
experienced a selloff relative to Treasurys, according to
MarketAxess. Bonds from Citigroup Inc. (C), Morgan Stanley (MS),
and Goldman Sachs Group Inc. (GS) all weakened.
More broadly, corporate bonds are maintaining recent gains
thanks to a surplus of investor cash and a dearth of alternatives
for investors.
A recent survey of investors from Bank of America Merrill Lynch
found high-grade investors expect spreads to remain flat over the
next three months but tighten further, or improve, over a longer
period. A net 9% expect tighter spreads in six months and a net 23%
expect tighter spreads in 12 months, the bank found.
The Barclays high-grade index showed average spreads at just
1.87 percentage points Monday, versus 2.15 points in early June.
Meantime, yields broke the 3% barrier for the first time in four
decades of data last week. As of Monday, average yields were at
2.98%.
Write to Patrick McGee at patrick.mcgee@dowjones.com
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