Sales of corporate bonds in the U.S. are surging toward the busiest May ever as borrowers race to the market before demand dries up with Bill Gross and Warren Buffett cautioning against buying debt at all-time low yields.
Petroleo Brasileiro SA’s $11 billion deal, the biggest on record for an emerging markets issuer, leads sales this month of $120.2 billion, on pace to exceed the unprecedented $162.6 billion sold in May 2008, data compiled by Bloomberg show. Issuance has already eclipsed the $108.2 billion sold in all of May 2012.
Borrowers are accelerating sales as speculation mounts that yields may only rise amid signs the economy is improving. Three Federal Reserve regional bank presidents called last week for phasing out the central bank’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum, potentially reducing demand for riskier assets from stocks to speculative-grade bonds.
“Many issuers may decide it is not worth tempting that fate,” Edward Marrinan, a macro credit strategist at RBS Securities in Stamford, Connecticut, said in a telephone interview. The firm is one of the 21 primary dealers of U.S. government securities authorized to trade with the Fed.
Tempting Fate
Buffett, the billionaire chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc., told Bloomberg Television this month that he felt “sorry” for fixed-income investors with yields on corporate bonds so low.
Yields fell to an unprecedented 3.35 percent on May 2 from more than 11 percent in 2008, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index. That represents interest savings of about $76.5 million a year on every $1 billion borrowed. Yields ended last week at 3.465 percent.
Gross, manager of the $293 billion Total Return Fund for Newport Beach, California-based Pacific Investment Management Co., said in a Twitter post on May 10 that a three-decade bull market in bonds probably ended April 29. Investors chasing yield have led to “frothiness” in some markets, analysts at Morgan Stanley led by Adam Richmond in New York wrote in a May 17 report.
“Investors have cash to spend yet fewer alternatives to buy,” the Morgan Stanley analysts wrote. Purchasers are having to accumulate corporate bonds “at levels sometimes not justified by fundamentals,” they wrote.
Spreads, Swaps