Wondering why so many companies are having trouble bringing new bond issues to market?
It’s simple: jittery investors are afraid of them.
The evidence is in the spreads between corporate bonds and comparable Treasuries. The spreads are now at a record width for the decade.
The average yield on investment-grade corporate bonds is now 2.51 percentage points over Treasuries, the widest in at least 10 years, according to Merrill Lynch & Co.
The yield difference between junk bonds and Treasuries has been around 10 percentage points since mid-August, recently reaching an all-time gap of 10.82 percentage points.
The solution? An improvement in corporate profits. Then investors won’t be worried about companies’ ability to pay the principle and interest in a timely way.
Interestingly, the spread between corporate bonds and Treasuries hit its intrayear low of 1.58 percentage points as recently as June 5, according to Merrill.
The upshot: companies that want to issue debt now may pay an average of $9.3 million more in annual interest costs for every $1 billion borrowed than they would have if they sold in early June, provided Treasury yields remain unchanged.
This explains why just $144 billion worth of corporate bonds have been issued this year, compared with $204 billion in the same period last year.
Even so, now is a very good time for top-rated companies to issue bonds.
For example, Bloomberg points out that Wells Fargo & Co., rated Aa2 by Moody’s, recently sold $300 million of five-year notes with a coupon of just 3.75 percent. “People who aren’t creditworthy can’t get money,” treasurer Nino Fanlo told Bloomberg. “Companies that are in good shape can.”