For the first time on record, investors are demanding a smaller premium to own US corporate bonds than global company debt.
Bondholders demand 166 basis points more in yield to hold US investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies paid about 150 basis points more to attract US investors to their bonds than borrowers seeking buyers elsewhere in the world.
The shift highlights confidence in North America’s economic recovery as companies across the Atlantic in Europe contend with the cost of bailing out Greece and Ireland while waiting to see whether the fiscal crisis ensnares more countries. The US economy is forecast to grow faster this year than either the euro region or Japan, according to Bloomberg surveys.
“In the US you have a little more optimism while in Europe you have more concerns about the sovereigns,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London. “The sovereign issues are holding back spreads in Europe.”
The Federal Reserve’s second round of so-called quantitative easing will boost returns for US bond investors, said John Brynjolfsson, chief investment officer of Aliso Viejo, California-based hedge fund Armored Wolf LLC. The program, also known as QE2, calls for the central bank to buy $600 billion in Treasuries through June.
“With the strong stimulus package and QE2, I expect 2011 to be a relatively strong economy and corporate bonds tend to do pretty well in that environment,” Brynjolfsson, who oversees $362 million, said December 3 on Bloomberg Television. “Even if corporate yields rise a little bit it’s likely spreads tighten, which corporate bond managers like to see.”
Elsewhere in credit markets, corporate bond sales worldwide topped $3 trillion for a second straight year. Leveraged-loan issuance in the US more than doubled in 2010 and bond sales linked to automobile and education loans and credit card debt fell to $92 billion, from $134 billion a year earlier, according to Bank of America Merrill Lynch data. Junk-rated companies, set a record for corporate bond offerings in the US, data compiled by Bloomberg show. Ally Financial Inc, Ford Motor Credit Co and other speculative- grade companies rated below Baa3 by Moody’s Investors Service and BBB- by S&P, sold $286.7 billion of debt in the US, smashing the previous record of $162.7 billion in 2009.
The extra yield that investors demand to own corporate versus government debt globally was unchanged at 169 basis points on December 31, Merrill Lynch Global Broad Market Corporate Index data show. Yields fell 1 basis point to 3.9 per cent, the data show.
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Loans rebound
Private-equity firms seeking money for buyouts and corporate borrowers that needed to refinance existing debt spurred the surge in leveraged loans.
More than $374 billion of loans were raised up to December 31, led by financing for the purchases of Tomkins Plc and Burger King Holdings Inc. The tally climbed from $170 billion in 2009, according to data compiled by Bloomberg. Interest rates on loans fell to 391 basis points more than the London interbank offered rate on average, from 1,028 basis points at the end of 2009, according to Standard & Poor’s Leveraged Commentary and Data. A basis point is 0.01 percentage point.
In the market for consumer debt bundled and sold as securities, bond offerings tied to automobile loans and leases dominated sales of asset-backed debt for a third straight year. More than 66 per cent, or $61 billion, of 2010 sales were connected to automobile debt.
ABS spreads
Top-rated securities linked to auto loans yielded 56 basis points more than Treasuries as of December 30, down from a spread of 81 basis points a year earlier, according to Bank of America Merrill Lynch data. That compares with a narrowing of relative yields to 191 basis points from 196 for securities tied to student loans and a drop to 69 basis points from 92 for credit card-related debt.
In emerging markets, relative yields fell 33 basis points during the year to 244, JPMorgan Chase & Co index data show.
Average corporate bond spreads outside the US are historically lower in part because the average maturity is 7.8 years, 21 per cent shorter than in the US, based on the Bank of America Merrill Lynch indexes. US corporate bonds make up half of the worldwide index and European securities account for 30 per cent.
US spreads on bank bonds narrowed to 215 basis points on December 22, erasing the borrowing advantage of financial companies issuing debt elsewhere in the world for the first time since June 2003, Bank of America Merrill Lynch index data show. Spreads on bank debt globally touched 216 basis points that day.
‘Highly accommodative’
“One of the factors that has helped boost the credit outlook for financial institutions in the US is highly accommodative Fed policy,” said John Lonski, the chief economist at Moody’s Capital Markets Group in New York. “That’s allowing them to build up earnings for the purpose of compensating for credit losses arising from the exposure to real estate and other toxic assets.”
The Fed has held the target for its overnight lending rate at zero to 0.25 per cent for more than two years. The European Central Bank’s benchmark rate has been 1 per cent since May 2009.
Spreads on US investment-grade corporate bonds widened to as much as 150 basis points more than global company debt in December 2008, less than three months after Lehman Brothers Holdings Inc collapsed in the largest bankruptcy in American history. Relative yields on corporate bonds around the world averaged 35 basis points tighter than US spreads since 1996, when the daily index data began.
Jobless claims, growth
Claims for US jobless benefits dropped in the week ended December 25 to the lowest level in two years, showing a turn in the nation’s labor market as the economy accelerates into 2011. Applications for unemployment assistance fell by 34,000 to 388,000, breaking the 400,000 level for the first time since July 2008, according to Labor Department figures.
The US economy may grow 2.6 per cent in 2011, according to the median forecast of 69 economists in a Bloomberg survey. That compares with 1.5 per cent for the countries that share the euro and 1.3 per cent for Japan, separate Bloomberg surveys show.
Pacific Investment Management Co, manager of the world’s largest bond fund, increased its forecast for US growth in 2011 after the Obama administration struck a deal with Congress to extend tax cuts and unemployment benefits. Gross domestic product may expand at an annualized rate of 3 per cent to 3.5 per cent by the end of the year, compared with an earlier estimate of 2 per cent to 2.5 per cent, according to Pimco.
Fiscal crisis
At the same time, investors are weighing possible outcomes for Europe as the region contends with a burgeoning fiscal crisis.
Moody’s Investors Service and S&P cut their ratings on Greece, Ireland, Spain and Portugal last year as those countries struggled to reassure investors they will be able to manage their debts. Spreads on euro-denominated investment-grade corporate bonds widened to 191 basis points on December 31, compared with 166 basis points for US debt.
S&P lowered 1.7 times as many corporate bond ratings in western Europe as it raised in 2010, Bloomberg data show. In the US, more companies had their credit ratings lifted than cut for the first time since 1997.
“European sovereign concerns will continue to dog fixed-income markets there relative to the US,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $72 billion in assets.
Bonds from Goldman Sachs Group Inc, Wall Street’s most profitable securities firm, and New York-based Citigroup Inc posted the largest excess returns in December among the 50 biggest issuers in the Bank of America Merrill Lynch Global Broad Market Index. Debt issued by London-based Royal Bank of Scotland Group Plc and Italy’s UniCredit SpA suffered the biggest losses.
Citigroup notes returned 1.73 per cent more than benchmarks and Goldman Sachs debt gained 1.74 per cent, the index data show. That compares with losses of 0.28 per cent for RBS bonds and 0.26 per cent for UniCredit securities.