Low rates and strong demand are spurring a gusher of new corporate bond offerings this week, and the flood is likely to continue for at least another couple of weeks.
This week is one of the busiest of the year for investment-grade corporate issuance, as treasurers take advantage of a recent slide in rates. Google was among the most high-profile, coming to market Monday for the first time, for $3 billion in 3-year, 5-year and 10-year bonds. Google's 10-year priced to yield 3.734 percent, while the 10-year Treasury yields about 3.16 percent.
Johnson and Johnson , one of the few AAA-rated corporates, set record low coupons on a number of issues Tuesday when it offered a total $3.75 billion in bonds.
As of Wednesday, $26.15 billion worth of investment grade bonds were offered this week, according to Thomson Reuters IFR.
Norfolk Southern priced $400 million in rare 100-year bonds, at 6 percent Wednesday. Other issuers Wednesday included Disney , with $500 million in 10-years; and Liberty Mutual with $600 million in 10-years.
Another closely watched offering comes Thursday, as Chrysler brings a $3.5 billion senior secured second lien bond deal. Chrysler would add to the $6.3 billion already issued in high-yield offerings this week, according to IFR. By midweek, investment grade issuance for May stood at $63.63 billion, and year-to-date, the total is $379.13 billion. As of this time last year, corporations had issued just $264 billion in investment grade debt.
Another $131.8 billion was issued in high-yield issues since the start of the year, up from just $97 billion in the same period last year, according to IFR data.
"I think probably the primary driver of issuance is demand, and I think many people stayed underweight bonds and there's been an allocation, if you look at mutual funds, there's been more inflow into equities and less into bond funds, and I think now that yields have come down, there's a lot of money to be invested," said Jim Caron, global head of interest rate strategy at Morgan Stanley.
Analysts also say the end of the Fed's quantitative easing program, known on Wall Street as QE2, could be a factor. The expiration of the Fed's Treasury purchase program in June is likely to result in a period of higher rates, according to Caron. But for now, it appears to be helping send rates lower, as investors who have been unwinding holdings in risk assets reallocate capital.
"It's a combination of rates going down, and we're just winding up an earnings season and a lot of companies are moving out of their blackout period, and I think there's a debate in the market come June and July with regards to QE2," said Joel Levington, managing director at Brookfield Investment Management.
Levington said acquisitions may be a motivator for some companies coming to market, and there will be companies borrowing at super-low rates that have plenty of cash. Google, for instance, has some $37 billion in cash.
"I think a lot of the corporate cash that's parked on balance sheets happens to be outside of the U.S. Despite the fact companies have high cash balances, they can't use it economically in terms of repatriating the cash. This is an alternative way of getting cheap financing, instead of bringing your own cash back," said Levington.
He does expect issuance to slow as the end of QE2 approaches, coinciding with the seasonally slower summer period. But for now, companies will keep coming to market. "I think you'll definitely see activity in the industrial space. In tech you'll see it, and more in health are. I wouldn't be surprised to see more in consumer products," he said.
Separately, Levington said he is looking at the secondary market for retailers' bonds as the retailers release earnings this week. One thing he is watching is the rivalry between Home Depot and Lowe's .
"I think there's upside at Home Depot in terms of their ratings," he said.
He said Home Depot could potentially be moved up to an A rating, while Lowe's, recently cut to single-A, could be moved lower.
"Lowe's was recently downgraded by the agencies, but it still looks overrated to us," said Levington.
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