Raymond James Market Update: The Year of the Corporate BondDecember 3rd, 2012 by Raymond James
As the final month of 2012 gets underway we find ourselves at a very interesting point in time for the corporate bond market. Year-to-date debt issuance is nearing its all-time annual record of $3.9 trillion set back in 2009 at a time when issuance surged as companies utilized the credit markets after the financial collapse of 2008. It makes sense that 2012 could be the year of the corporate bond despite several factors still clouding the investment environment. The situation in Washington D.C. regarding the proverbial “fiscal cliff” has yet to see any meaningful progress, Greece and part of the Eurozone are still struggling with their untenable debt situation, and global growth continues to remain weak in the face of high unemployment. Despite all these concerns, times are so good for corporate issuance that companies such as Amazon.com jumped into the market to borrow funds for the first time in recent memory. In fact, Amazon’s borrowing of $3 billion was the first foray into the markets since 1999 when the company issued then convertible debt during the height of the technology boom. According to Bloomberg, thanks to such deals last month marked the busiest November on record with a staggering $386.7 billion being raised despite having to compensate for the Thanksgiving holiday interruption. Even if we step back from global issuance and merely look at U.S. debt, we can see the trend holds true in the domestic market as well; year-to-date issuance hit an all-time record of $1.43 trillion last month and reinforces the blistering pace we began seeing in late September.
So what is causing such an overwhelming and consistent willingness for corporate borrowers to tap the markets? As most would guess, Treasury yields continue to remain low thanks to the Federal Reserve’s commitment to keeping longer-term rates in check and a general “safety bid” permeates the market thanks to the many aforementioned uncertainties facing both the domestic and international markets. Yields on the 10-year Treasury note sat at 1.61% at the end of November, down considerably from the 1.80% levels seen at intervals in August through October. As a reminder, 10-year rates stood as high as 2.37% back in March and fell as low as 1.38% back in late July. Meanwhile, the perceived risk of corporate credit, as measured by the 5-year Markit Credit Default Swap Index (purple line below) stood at 97bp after having hit as high as 126bp back in June. This index increases as the perceived risk of owning corporate debt rises and falls when corporate issuers are deemed more credit-worthy. Not surprisingly, borrowers are shifting away from shorter-dated maturities instead choosing to favor more longer-dated bonds. According to Bloomberg, global issuance of 10-year maturities represented over 20% of all new bonds compared with only 17% last year. 30-year bonds also increased to nearly 5% from only being 3.4% in 2011 while 3-year maturities fell from 16.6% to 14.5%. It will be interesting to see how December fares, but it’s hard to argue that 2012 was anything but the year of the corporate Bond.