Sales of floating-rate debt are accelerating as Pacific Investment Management Co.’s Bill Gross says investors should buy the securities to protect against a possible rise in interest rates.
Australia & New Zealand Banking Group Ltd., life insurer MetLife Inc. and General Electric Co.’s finance unit led $5.25 billion in sales of floating-rate bonds this week, the most in 11 months, according to data compiled by Bloomberg. Sales declined 52 percent last year from 2009.
Companies are taking advantage of investor concern that the Federal Reserve’s expansion of record monetary stimulus will drive interest rates higher. Futures show traders are betting there’s a 50.1 percent chance the central bank will boost borrowing costs by November.
“There’s interest in owning floating-rate exposure because at some point the continued improvement in the economy is threatening to push rates upward later in the year,” said Justin D’Ercole, the head of investment-grade syndicate for the Americas at Barclays Capital in New York. “If everyone is maxed out on fixed-rate paper, they’re going to suffer.”
Rising yields brought on by faster inflation will mean that “long-term bondholders lose their heads” and face losses, Gross, who manages the world’s largest bond fund, wrote in a commentary posted yesterday on Newport Beach, California-based Pimco’s website.
Gross recommended “floating as opposed to fixed interest obligations,” as well as emerging-market corporate bonds, sovereign debt and notes in currencies other than the dollar.
Treasury Yields
The yield on the benchmark 10-year Treasury note has soared to 3.47 percent from 2.38 percent in October, the lowest since January 2009. It may climb to 3.53 percent by year-end, according to the average estimate in a Bloomberg survey of 66 economists.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt fell 1 basis point to 166 basis points, or 1.66 percentage points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 3.965 percent.
Companies sold $9.7 billion of bonds in the U.S. yesterday, following $21.2 billion on Jan. 4, the most since Sept. 15, 2009, Bloomberg data show. Leveraged loan prices rose to the highest in almost two years and junk bonds spreads declined to the lowest since November 2007.
Melbourne-based ANZ raised $3 billion in a three-part offering, including $1 billion of floating-rate notes due January 2014 that pay 74 basis points more than the three-month London interbank offered rate. The bank initially offered $750 million of the securities.
Toyota Bonds
Toyota Motor Credit Co., the U.S. finance unit of the world’s largest automaker, sold $1.6 billion of 5- and 10-year debt, locking in cheaper rates than in its last benchmark offering of the maturities, Bloomberg data show.
Toyota Motor Credit’s $900 million of 2.8 percent, 5-year notes pay a spread of 70 basis points and its $700 million of 4.25 percent, 10-year bonds yield 80 basis points above Treasuries, the data show. In June, the Toyota Motor Corp. unit sold $1.25 billion of 3.2 percent, 5-year notes at a 120 basis- point spread and $750 million of 4.5 percent, 10-year notes at 130 basis points.
Bondholder Protection
The cost of protecting European bank debt from default rose to a six-month high on concern so-called burden sharing proposals may force bondholders to shoulder losses from bank failures. The Markit iTraxx Financial Index of contracts on 25 European banks and insurers climbed to 185.5 basis points, the highest since June 9, JPMorgan Chase & Co. prices at 11 a.m. in London show. The European Commission may issue a new draft of the rules today.
Contracts insuring European high-yield corporate bonds fell, with the Markit iTraxx Crossover Index of credit-default swaps on 50 speculative-grade issuers down 3 basis points to 415, JPMorgan data shows.
Credit 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.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index climbed for an eighth straight day, rising 0.29 cent to 93.5 cents on the dollar. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, is at the highest level since Jan. 18, 2008 and has risen from 92.91 cents at the end of December. Rising prices help companies improve the terms of their debt agreements.
CommScope Inc. set pricing on a $1 billion term loan the company is seeking to help fund its acquisition by Carlyle Group, according to a person familiar with the transaction.
Covenant-Lite
The loan is covenant-lite, meaning it doesn’t have financial-maintenance requirements, the person said. The telecommunications-equipment provider will pay an interest rate 400 basis points more than Libor, said the person, who declined to be identified because the terms are private. Libor will have a 1.5 percent floor, the person said.
The Hickory, North Carolina-based company may sell the debt at 99 cents on the dollar, said the person, reducing proceeds for the borrower and boosting the yield for investors.
Investors are accepting the lowest relative yields on speculative-grade bonds in more than three years.
Spreads on junk debt shrank 16 basis points to 511 basis points, the lowest since Nov. 14, 2007, Bank of America Merrill Lynch index data show.
High-yield, high-risk loans and bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P.
In emerging markets, relative yields fell 10 basis points to 219, the third straight day of declines and the lowest level since Dec. 14, according to JPMorgan Chase & Co. index data.
Floating-Rate Notes
Borrowers issued $87.8 billion of floating-rate notes in 2010, including $8.01 billion in December, the fourth-busiest month of the year, Bloomberg data show. They sold $182 billion in 2009, including $91 billion under the Federal Deposit Insurance Corp.’s Term Liquidity Guarantee Program.
Investors deposited a record $10.4 billion into funds investing in floating-rate bonds and loans last year, including $2.1 billion in December as Treasury rates rose, according to EPFR Global, a Cambridge, Massachusetts-based firm that tracks the flows. U.S. funds accounted for $10.1 billion of the total.
“The inflows were driven by the anticipation of inflation and its deleterious impact on bonds,” said Brad Durham, managing director at EPFR. “Floating-rate fixed income is one of the only places of refuge in a rising-rate and rising- inflation environment.”
‘Best Value’
Floating-rate notes will have their “best value” next year as inflation and interest rates climb, said Mark Grant, a managing director at broker-dealer Southwest Securities Inc. in Fort Lauderdale, Florida.
MetLife, based in New York, issued $500 million of floating-rate notes due in January 2014 on Jan. 4, Bloomberg data show. BNP Paribas SA and Barclays Plc also sold the debt this week as issuance climbed to the highest since the period ended Jan. 29, 2010, when $6.53 billion was sold.
GE Capital sold $2.25 billion of floating-rate notes as part of its $6 billion offering Jan. 4, the largest in 11 months, Bloomberg data show.
Bonds from Fairfield, Connecticut-based GE were the most actively traded U.S. corporate securities by dealers, with 411 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Fed Target Rate
Futures contracts on the Chicago Board of Trade on whether Fed policy makers will raise their target rate for overnight loans between banks by at least a quarter-percentage point by their November meeting have climbed from 30.8 percent a month ago. The Fed has held the target for its overnight lending rate at zero to 0.25 percent since December 2008.
Fed policy makers said Jan. 4 that improvements in the economy didn’t meet the threshold for scaling back plans to purchase $600 billion in Treasuries through June.
“If the Fed gets it right, floating rate supply in the second half of the year should be two times what it was in the first half of the year,” Barclays’s D’Ercole said.
Pimco boosted its forecast for U.S. growth in 2011 after President Barack Obama reached a deal with Congress to extend tax cuts and unemployment benefits. Gross domestic product may grow at an annualized rate of 3 percent to 3.5 percent in the fourth quarter, compared with an earlier estimate of 2 percent to 2.5 percent, Pimco said.
To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
