Corporate bond trading is soaring to record levels in the U.S. with the biggest buyers churning more of their funds as policy makers consider tapering unprecedented economic stimulus.

Regulatory data show average investment-grade trading rose to $13.9 billion for the busiest May ever, accelerating after Federal Reserve Chairman Ben S. Bernanke said the central bank could slow unprecedented stimulus if the economy shows sustained improvement. Loomis Sayles & Co.’s Dan Fuss said last week he’s shifting into shorter-dated notes in anticipation of rising interest rates.

Investors who had grown reluctant to part with bonds during the biggest four-year rally since 1993 are more willing to trade the notes with the Bank of America Merrill Lynch U.S. Corporate index posting its biggest monthly loss since the height of the credit crisis. With money managers racing to protect their gains as yields climb from a record low 2.65 percent reached on May 2, top-graded notes maturing in less than three years are returning more than longer-dated debt for the first time since 2009.

“You can make money in a bond portfolio,” Fuss, manager of the $23.2 billion Loomis Sayles Bond Fund, said May 30 in an interview at Bloomberg LP headquarters in New York. One way to do it is to “bring in the maturities, ax the market sensitivity,” said Fuss, whose fund has beaten 97 percent of rivals during the last three years.

Bond Losses

Investment-grade trading volumes rose 17.8 percent from $11.8 billion in the corresponding month last year and surpassed the previous record of $13.4 billion in May 2009, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

As concern mounts that prices for government debt will fall if the Fed begins to slow its $85 billion of monthly bond purchases, investors are rushing to sell notes that are most- sensitive to moves in Treasury yields.

Investment-grade corporate bonds that mature in seven-to-10 years lost 3 percent in May, the biggest monthly decline since a 9.2 percent loss in October 2008 at the height of the credit crisis, according to Bank of America Merrill Lynch index data. Notes due in one-to-three years declined 0.12 percent.

Pimco Fund

Pacific Investment Management Co.’s $5.1 billion Total Return Exchange-Traded Fund is reducing its longer-maturity debt, cutting the proportion of notes due in more than 10 years by 13.4 percentage points in the first five months of the year to 32 percent, according to data compiled by Bloomberg. The fund almost quadrupled its allocation of debt maturing in one-to- three years to 20 percent.

“For a while there, we’ve all been on the same side of the trade, with everyone having a pretty constructive view of credit,” said Brian Machan, a Des Moines, Iowa-based money manager at Aviva Investors North America Inc. who helps oversee $433 billion. “There are starting to be different views on the start of the Fed tapering.”

Elsewhere in credit markets, EMC Corp. sold $5.5 billion of bonds in its first offering since 2007. The record pace of U.S. junk-bond sales is weakening credit quality as debt loads expand and cash piles erode, according to Morgan Stanley. Carestream Health Inc. raised the rate on $2.5 billion of loans it’s seeking to pay a dividend and refinance debt.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, increased 0.35 basis point to 16.4 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

Bonds of Morgan Stanley were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3.3 percent of the volume of dealer trades of $1 million or more, Trace data show.

EMC, the world’s biggest maker of storage computers, sold $2.5 billion of five-year, 1.875 percent notes that yield 85 basis points more than similar-maturity Treasuries; $2 billion of seven-year, 2.65 percent securities with a 115 basis-point spread; and $1 billion of 10-year, 3.375 percent bonds at 125, Bloomberg data show. The spread on the 10-year securities was wider than an initial price estimate of between 115 basis points and 120 basis points made earlier yesterday.

Default Swaps

Proceeds will be used to repay its $1.71 billion of 1.75 percent convertible debt maturing in December, as well as to fund general corporate purposes including stock buybacks, Hopkinton, Massachusetts-based EMC said in a regulatory filing. The new bonds are EMC’s first since issuing the convertibles in February 2007, Bloomberg data show.

The cost of protecting corporates bonds from default in the U.S. fell. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 0.4 basis point to a mid-price of 78.7 basis points, according to prices compiled by Bloomberg.

The Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, fell four basis points to 103.6 at 11:30 a.m. in London.

Both indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

‘Hoard’ Impulse

U.S. junk-rated companies increased borrowings by 10 percent in the first quarter from a year earlier while the ratio of cash to debt fell to 9.6 from almost 15 percent in 2010 and is approaching the long-term average of 8.7 percent, Morgan Stanley strategists led by Adam Richmond in New York wrote in a note to clients. Even as earnings growth slows and the economic expansion sputters, companies are “no longer feeling the need to hoard cash,” they wrote.

“Low rates have served as both a positive and a negative driver of corporate fundamentals,” the analysts wrote. While “low rates have allowed companies to lower coupon payments, in some cases quite dramatically, and push out upcoming maturities in the process,” they wrote, “today’s record low cost of debt has given companies the incentive to issue debt and increase leverage.”

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index fell 0.07 cent to 98.25 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 2.82 percent this year.

Carestream Loans

Leveraged loans and high-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.

A $1.85 billion first-lien loan for Carestream, the Onex Corp.-controlled provider of medical supplies and equipment, will pay interest at 4 percentage points more than the London interbank offered rate with a 1 percent minimum, up from 3.25 percentage points to 3.5 percentage points initially proposed, according to a person with knowledge of the matter. The debt will be sold to investors at 98.5 cents on the dollar, compared with 99 cents previously offered.

A $500 million second-lien portion will pay interest at 8.5 percentage points more than Libor with a 1 percent minimum on the lending benchmark, up from 7.5 percentage points initially proposed, the person said. It will be offered to lenders at 98 cents, compared with 99 cents initially.

Emerging Markets

In emerging markets, relative yields increased 4 basis points to 311 basis points, or 3.11 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index, which had averaged 282 this year.

Returns on investment-grade corporate notes suffered the worst loss in more than four years last month after Bernanke said May 22 that the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage bonds “in the next few meetings” on continued economic growth.

The 2.28 percent decline on the Bank of America Merrill Lynch U.S. Corporate index was the biggest since a 7.38 percent loss in October 2008, the month after the bankruptcy of Lehman Brothers Holdings Inc. ignited the worst financial crisis since the Great Depression. Yields have climbed to 3.004 percent as of yesterday.

While notes maturing in one-to-three years returned 0.7 percent this year through May 31, those due in seven-to-10 years declined 0.9 percent, Bank of America Merrill Lynch index data show. That’s the first time the shorter-term notes have outperformed longer-dated debt since the period in 2009.

‘Pretty Complacent’

The average daily volume of dollar-denominated investment- grade bonds traded in January through May rose to $13.4 billion, the most ever for the period, from $12.7 billion during the corresponding five months of 2012, Trace data show. Trading in the period from May 22 through the end of the month was up 5 percent from the rest of the year.

“People were pretty complacent going into that speech, really expected rates to stay at a really low level,” said Jon Sablowsky, the head of trading at Brownstone Investment Group LLC in New York. “We got some commentary that was unsettling for the market. It was a good catalyst.”

The proportion of investment-grade notes outstanding that traded on average each day from May 22 through the end of the month was 0.34 percent, about equal to the same period last year, Trace and Bank of America Merrill Lynch index data show. That’s a departure from the three full years after 2009, when daily average trading increased by 1.7 percent compared with a market expansion of 40 percent, according to the data.

“People are selling longer-end holdings and investing in shorter and safer paper,” Sablowsky said. There’s “lots of focus on duration for sure.”

Economic Rescue

Based on options trading, concern that Fed stimulus is poised for a reduction is taking a bigger toll on confidence in bond markets than stocks. Indexes that measure expected volatility in equities are diverging by the most in a year compared with Treasuries, Bloomberg data show.

Bank of America Merrill Lynch’s MOVE Index, which tracks option projections for swings in U.S. government debt, climbed 62 percent to 79.99 in May. That’s three times the monthly increase for the Chicago Board Options Exchange Volatility Index of Standard & Poor’s 500 Index contracts.

The Fed has pumped more than $2.5 trillion into the financial system as part of its effort to rescue the economy from the credit seizure. In the four years ended in December, dollar-denominated investment-grade notes returned 55.6 percent, the most since the 55.7 percent gain in the period ended Dec. 31, 1993.

‘Good Signs’

Fed Bank of San Francisco President John Williams said yesterday policy makers may start reducing the pace of bond purchases over the next three months and potentially end quantitative easing by year-end.

With continued “good signs” on jobs and confidence in a “substantial improvement” I could see as “early as this summer some adjustment, maybe modest adjustment downward, in our purchase program,” he said in Stockholm.

“People are not only shortening duration, they’re also moving up in quality,” said Charles Sanford, a managing director in corporate credit at Babson Capital Management LLC, which oversees more than $180 billion. “Shorter-duration, higher-quality corporate investment-grade securities are almost like the new Treasury right now.”