Capital Markets

Corporate Bond Market at Four-Month High

Signs of a re-emergence of corporate-debt issuance: a plunge in borrowing costs and narrowing spreads between corporate bonds and Treasuries.
Stephen TaubMay 31, 2005

The U.S. corporate bond market has apparently flung open its doors once again. Last week, companies issued $18.1 billion of debt, the most in four months, according to Bloomberg.

That was more than double the $8.5 billion raised two weeks ago and the most since companies raised $26.1 billion in the week ended Jan. 28, according to Bloomberg.

The reason for the surge is that borrowing costs have dropped, according to the wire service. Yields on the 10-year Treasury note—from which many other rates are priced—fell to as low as 4 percent on May 25, their lowest level since February 9. That’s down from a 2005 high of 4.69 percent on March 23, the wire service added.

In another indication of the re-emergence of corporate debt is that the spread between corporate bonds and Treasuries narrowed for the second straight week, helping to encourage companies to raise money in the debt market.

Further, new high-yield issuance nearly quadrupled last week, to $2.3 billion, as spreads narrowed 23 basis points, to 4.28, percent during the first three days of the week, Bloomberg reported, citing the JPMorgan High Yield Index.

Among last week’s largest issuers was Credit Suisse. Obviously unwilling to lock in a fixed rate despite the drop in rates, the financial giant sold $2 billion of three-year floating-rate notes.

Also last week, aluminum giant Alcan trotted out $800 million of 10-year notes and 30-year bonds. At the same time, the improved atmosphere for issuers enticed Thermo Electron Corp., a maker of analytical instruments for medical laboratories, to bring out its first debt issue since 1998. Thermo’s offering was $150 million in 10-year notes.

“It was a healthy environment to come back to issue long- term debt,” Thermo Electron Treasurer Kenneth Apicerno told Bloomberg. “We didn’t want to take any risk in terms of where the market could go. We were not in a rush, but by the time we were ready to go, Treasury yields looked great and spreads were comfortable.”

Still, there’s a yield widening waiting in the wings, Steven Hung, a portfolio manager at Charles Schwab Investment Management, told Bloomberg. “Issuers might have been thinking: ‘It is now or never. It will just cost more to fund, so let’s try to put in new issues here, while rates are somewhat low.’”

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