Credit

Cost of Borrowing Drops For Most Issuers

But junk bonds yields are now as high as 21 percent over Treasurys.
Ed ZwirnJuly 13, 2001

Most corporate bond issuers should take heart from the past week.

Reversing a recent trend, most corporate bond yields fell during the week ending July 12, the first such drop registered since the last Federal Open Market Committee action last month.

But while index figures supplied by Merrill Lynch to CFO.com (see chart below) showed lower option-adjusted yields lower on the week for issues rated double-B or better, the lowest rungs of the junk ladder continued to experience a sharp decline in investor confidence and demand.

Single-C-rated bonds, at 25.821 percent now fetch nearly 21 percent (or 2,068 basis points) more than comparable Treasurys.

Not surprisingly, triple-A-rated bonds, at 5.702 percent, saw the greatest improvement, with absolute yields dropping nearly 17 basis points.

In addition, double-A paper saw its yield drop by nearly 16 basis points; single-A, 16.5 basis points; triple-B, 16 basis points; and double-B, 7.5 basis points.

On the other hand, single-B issues saw yields rise by more than 14 basis points, while single-C yields were up more than 57 basis points.

In the meantime, most issues stayed relatively steady in relation to benchmark Treasurys during the week, with spreads for every rung on the credit ladder from triple-B and up moving by less than a point.

Again, the losers in this respect were to be found closer to the bottom:

Double-b-bonds widened 10 basis points in relation to Treasurys; single-B, 33 basis points; and single-C, 74 basis points.

In addition, most bonds continue to give lower yields than they did one year ago.

Yields and spreads on most bonds rated double-B or better are still significantly lower than they were on July 12, 2000, while lesser quality bonds are paying out more and lagging farther behind Treasurys.

This is most pronounced at the lowest rung of the credit ladder, where single-C-rated bonds yielded 20.864 percent, or 1,460 basis points over Treasurys.

Indicative Corporate Bond Yields/Spreads

(10-year industrial, option adjusted) (Wk ending July 12-2001)

CURRENT WEEK AGO YEAR AGO
Rating** Yield Spread* Yield Spread* Yield Spread*
AAA 5.702% 83 5.868% 83 7.329 105
AA 5.904 100 6.060 99 7.523 126
A 6.351 135 6.518 134 7.823 155
BBB 7.194 205 7.354 204 8.401 215
BB 9.014 398 9.089 388 10.319 405
B 13.036 798 12.893 765 12.048 578
C 25.821 2068 25.248 1994 20.864 1460

Click here for last week’s article, chart.

* Basis points over Treasurys ** Standard & Poor’s

Source: Merrill Lynch & Co.