Is Bond Issuance Out of Hibernation?

What is the story behind the astonishing pace of bond issuance of the past few days?
Ed ZwirnJuly 26, 2001

Does the activity of the past day or two indicate that bond market issuance is actually shrugging off its summer slumber?

Bond pricings by issuers on July 25 and 26 alone include more than $11 billion of borrowing by firms such as Wal-Mart Stores, PNC Funding Corp., and Qwest Capital Funding, bringing the weekly total to over $13 billion so far this week.

Propelling this rush in large part: Absolute yields are as low as they have been at any time since late March. The average yield on a 10-year single-A-minus industrial had been trending downward throughout the month, accelerating sharply in that direction since July 18, when Federal Reserve Chairman Alan Greenspan gave the first of two semi-annual monetary addresses before Congress.

His message — that the economic slowdown would be more prolonged than his earlier forecasts would have indicated — gave solace to bondholders worried about inflation and signaled to the broader market that the Fed, which has cut short-term borrowing rates six times (275 percentage points) so far this year, would most likely do so again when the Federal Open Market Committee meets next month.

The fallout, at least over the last couple of days, has been impressive:

  • Wal-Mart‘s $3 billion deal via Lehman and Goldman Sachs. The (Aa2/AA) offering was evenly split between 4.375 percent two-year notes, which priced at a discount to yield 4.452 percent, or 52 basis points over Treasurys, and 5.45 percent five-year paper, which priced at a discount to yield 5.493 percent, or 84 over.
  • A bit farther down the credit spectrum, PNC Funding Corp., a subsidiary of Pennsylvania’s largest bank, priced $1 billion of (A1/A-) bonds via JP Morgan and Salomon Smith Barney, including a $300 million two-year floating-rate issue at 22 basis points over the three-month London Interbank Offered Rate (LIBOR) and a $700 million 5.75 percent five-year notes priced at a discount to yield 5.788 percent, or 110 basis points over Treasurys.
  • Farther down still, Qwest Capital Funding unloaded a (Baa1/BBB+) $3.75 billion three-tranche offering via the rule 144a “private” market. The Merrill Lynch and Lehman-led deal included a $41.25 billion 5.875 percent three-year priced to yield 5.904 percent, or 152 basis points over Treasurys, a $2 billion eight-year priced to yield 7.124 percent, or 197 over, and a 7.625 percent 20-year priced to yield 7.728 percent, or 209 over.

Click here for further details on these and other pricings, according to Standard & Poor’s MMS

But while these deals, with their historically low yields, certainly look attractive from an issuer standpoint, bond industry insiders maintain that the past couple of days are hardly any indication of a resurgence to the record pace of issuance experienced earlier this year.

“Issuers have stuff to do,” says Dan Benton, who heads Deutsche Bank’s investment-grade syndicate desk in New York. “The beginning of the month was very slow, and many of them are making up for lost time, so at the end of the day, it’s still going to be one of the slowest months we’ve had recently.”

On the other hand, he added, “it doesn’t hurt that the market’s better, make no mistake about it.”