Corporations seem to be taking advantage of the unexpected dip in interest rates by issuing new debt. Last week, they raised $21.7 billion in the bond market, according to Bloomberg.
Although that was about in line with the prior week, it nearly doubled the $11 billion average for the year, the wire service noted.
The debt issuers are cashing in on a five-month low in market interest rates. Surprisingly, rates have reached that nadir despite the fact that the Federal Reserve has hiked short-term interest rates three times since the beginning of the summer.
Why the disconnect between the marketplace view and that of the Fed? Apparently, the reason is that investors are not as optimistic about the economy’s prospects as Alan Greenspan and his cohorts are.
Leading last week’s underwriting charge was Wells Fargo, the nation’s fourth largest bank, which raised $3.5 billion from the sale of three-year floating-rate notes, according to several wire services. Merrill Lynch & Co. and Morgan Stanley were the joint lead managers.
Interestingly, the day before the sale, Wells Fargo hiked its prime lending rate by 25 basis points, to 4.75 percent, in response to the Fed’s rate increase. The prime rate, a borrowing rate it charges its top customers, typically serves as a benchmark for consumer borrowers.
Also last week, investment banking giant Goldman Sachs sold $2.15 billion of 10-year notes, including $1.25 billion of 10-year fixed-rate notes and $900 million of 10-year floating rate notes, according to Reuters. It had originally planned to raise just $1 billion.
Bloomberg reported that the yield on A-rated financial bonds fell to around 4.08 percent last week, the lowest level they have been since April 19. To be sure, financial services firms are typically more active than other borrowers, and last week was no exception.
Indeed, the sector accounted for 84 percent of the investment-grade issuance, the wire service noted. “Financial borrowers are the first ones in when borrowing costs are low, ” Stephen Mahoney, portfolio manager at Glenmede Trust Co., told Bloomberg.
One non-financial borrower, however, was Enterprise Products Partners LP, a natural gas company. Enterprise issued $2 billion of notes and bonds in four parts in the private-placement market. They include $650 million of 10-year notes and $500 million each of three-year and five-year notes.
Proceeds from the offering will be used to fund the company’s planned merger with GulfTerra Energy Partners, L.P, according to the company.
Meanwhile, the junk bond market has also been picking up of late. Last week, for example, EchoStar Communications Corp. sold $1 billion of 10-year senior notes in the private-placement market. The company said it will use the proceeds to redeem 10.38 percent senior notes that are due in 2007.