Yields Tumble as Credit Market thawed
Investors are snapping up new corporate bonds at the fastest pace since May, driving down yields from record highs once they begin to trade.
New issue performance has been exceptional, it reflected a realization of the value in investment-grade credit.
The extra yield investors demand to own Tyco International Ltd. ’s $750 million of 8.5 percent notes due in 2019 has narrowed to 5.3 percentage points, from 6.81 when they were sold Jan. 6. spread on Volkswagen AG’s 1.5 billion euros of 6.875 percent 2014 bonds has shrunk to 4.34 percentage points from 4.53 on Jan. 7.
The rally shows that the freeze in credit markets that led to $1 trillion in writedows and losses at the world’s largest financial institutions is starting to thaw. Rising confidence in corporate bonds may help non-financial companies that need to replace $135 billion of debt this year in the U.S.
Bond yields compared with government debt more than compensate for the risk of rising defaults caused by the global recession. Returns may creep into double digits this year as governments rescue more businesses.
Other measures of risk also point to an easing in credit markets. The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.99 percentage point, the tightest spread in five months, after peaking at 4.64 percentage points in October following Lehman’s bankruptcy.
Bonds are rallying even as an increasing number of companies comes to market, with sales excluding banks rising this year to $49.9 billion in the U.S. and Europe from $16.8 billion in the same period in 2008, according to data compiled by Bloomberg. This month is the busiest since May.
Since peaking at a record 656 basis points on Dec. 5, the yield gap on U.S. investment-grade company debt has shrunk to 557 basis points, handing investors a return of 6.78 percent, according to Merrill Lynch index data. At the same time, U.S. government debt is paying near-record low yields.
New issue performance has been exceptional, it reflected a realization of the value in investment-grade credit.
The extra yield investors demand to own Tyco International Ltd. ’s $750 million of 8.5 percent notes due in 2019 has narrowed to 5.3 percentage points, from 6.81 when they were sold Jan. 6. spread on Volkswagen AG’s 1.5 billion euros of 6.875 percent 2014 bonds has shrunk to 4.34 percentage points from 4.53 on Jan. 7.
The rally shows that the freeze in credit markets that led to $1 trillion in writedows and losses at the world’s largest financial institutions is starting to thaw. Rising confidence in corporate bonds may help non-financial companies that need to replace $135 billion of debt this year in the U.S.
Bond yields compared with government debt more than compensate for the risk of rising defaults caused by the global recession. Returns may creep into double digits this year as governments rescue more businesses.
Other measures of risk also point to an easing in credit markets. The difference between what banks and the U.S. Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.99 percentage point, the tightest spread in five months, after peaking at 4.64 percentage points in October following Lehman’s bankruptcy.
Bonds are rallying even as an increasing number of companies comes to market, with sales excluding banks rising this year to $49.9 billion in the U.S. and Europe from $16.8 billion in the same period in 2008, according to data compiled by Bloomberg. This month is the busiest since May.
Since peaking at a record 656 basis points on Dec. 5, the yield gap on U.S. investment-grade company debt has shrunk to 557 basis points, handing investors a return of 6.78 percent, according to Merrill Lynch index data. At the same time, U.S. government debt is paying near-record low yields.
Labels: asset allocation, credit market
posted by Jiu Zhuang at
1:25 PM
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