UNITED STATES - Companies are borrowing $74 billion in the U.S. investment-grade bond market this week, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold notes as yields have dropped.
And the frenzy isn’t letting up. At least another $50 billion is projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers relatively higher returns, keeping demand strong in the U.S.
For investment-grade companies, the average yield on bonds was 2.77% as of Wednesday, according to Bloomberg Barclays index data. In late November, that figure was above 4.3%. For a company selling $1 billion of debt, that amounts to $15.3 million of annual interest savings, before taxes. Junk-bond yields have dropped too, with notes rated in the BB tier, the uppermost high-yield levels, paying a near record-low 4.07%.
It’s not clear how long that will last -- on Thursday, U.S. Treasury yields surged, with the 10-year note jumping as much as 0.12 percentage point to 1.59%. But for now the bond sales are intense enough to make up for a year that had previously been lackluster. Investment-grade issuance is now down just about 2% from the same point last year. In June, the gap was closer to 13%.
The recent spate of issuance is the latest surge in corporate debt sales, as companies have ramped up their borrowings to buy back shares and invest in new projects. Investment-grade debt outstanding totaled $5.8 trillion on Wednesday, more than double the level a decade ago.
The underwriting fees that the sales are generating are one of the few positives for bank profits that are expected to get hit by falling rates. The refinancing can also translate into greater trading revenues, said Bloomberg Intelligence analyst Arnold Kakuda.
It’s a stunning turnaround from late last year, when Scott Minerd, Guggenheim Partners’ global chief investment officer, said a sell-off in General Electric Co. debt signaled that “the slide and collapse in investment grade credit has begun.” While the investment-grade market last year generated losses of 2.5%, this year it’s up 14.2% including both interest and price gains, making it one of the best-performing assets in fixed income.
In the leveraged loan market, 17 deals totaling more than $16 billion have launched this week, making it the busiest week since October. Investment-grade and high-yield bankers are telling clients that the good times may not last.