Capital Markets

As the Fed Tightens Up, Bonds Surge

''If companies are looking to issue by year-end,'' observes an analyst, this is their window.
Stephen TaubNovember 16, 2004

Corporate America apparently believes that now is a great time to raise money in the bond market.

Last week — as the Federal Reserve raised short-term interest rates for the fourth time since the beginning of the summer — companies raised about $19 billion, according to Bloomberg. That total was the most in seven weeks, nearly double the $9.96 billion raised a week earlier, and much greater than this year’s average weekly volume of $11.6 billion, according to the wire service.

Investors apparently buy the Federal Reserve’s line that future inflation does not seem to be a strong threat. “People anticipate that rates are going to be rising,” Vincent Fea, head of investment-grade credit research at Deutsche Asset Management in New York, told Bloomberg. “By December the market shuts down, so if companies are looking to issue by year-end, they are looking at this window.”

Leading last week’s underwriting parade was BellSouth, which issued $2 billion of paper, including 3-year notes, 8-year notes, and 30-year bonds. This was the telecom giant’s third underwriting this year, according to the report.

In addition, $601.5 million was stashed in high-yield bond mutual funds last week — the largest weekly inflow since October 2003, according to AMG Data Services.

This is especially surprising, given that JP Morgan’s high-yield index is near its record low of just 7.14 percent, according to The Wall Street Journal, and the average junk bond is trading well above par. As a result, the average junk bond is yielding just 3.20 percentage points over Treasurys, the narrowest gap since the peak of the last high-yield rally in 1997, reported the Journal, citing Moody’s Investors Service. Bloomberg reported a gap of 3.71 percentage points, adding that it believes this spread is the narrowest since 1998.

In either case, last week below-investment-grade debt accounted for 29 percent of total debt sales, more than this year’s average of 25 percent, reported Bloomberg. Last week’s largest junk issuer was Irish pharmaceutical company Elan Corp., which trotted out $1.15 billion of 7-year notes. Elan originally had planned to raise $850 million.