Corporate America may try to outrun bond market bears with last-minute debt financings in the coming weeks, before signs of an economic recovery push interest rates any higher, market players say.
Though long-term yields have backed up 25 basis points in the past four weeks alone -- the Treasury's bellwether long bond was yielding 8.47% late yesterday, up from 8.21% at the May 9 auction -- chances are companies will keep bond deals coming.
That's because many corporate borrowers figure rates will head even higher if bond buyers believe the U.S. economy is getting back on its feet -- or worse, that inflation is on the rise, participants say.
For companies that still have debt offerings on the shelf, "if the economy is picking up . . . this would be the time to get in," said one capital markets professional.
Earlier this year, "a lot of corporations were thinking that when the economy turns, rates are going to go up, so it was a good chance" to lock in low rates, he said. "We've seen a huge decline in commercial paper over the last few months -- almost $6 billion -- and most of that has been the result of a shift to the long-term market."
While an outright expansion remains elusive, some economists say recent economic indicators -- home sales and consumer spending, for example -- have suggested the recession was bottoming out even before last Friday's surprise employment report. That data caught players flat-flooted with a 59,000 rise in nonfarm payrolls, leaving the 30-year bond at its highest yield so far this year.
But the jobs report may be only the beginning.
"As forecasters, we're looking for yields to rise a little bit right here as people react to additional data confirming the recession is ending," said David Rolley, senior economist at DRI/McGraw-Hill.
Mr. Rolley noted the long bond has traded in 25 basis point ranges this year: first to 8.25% from 8%, then to 8.5% from the present 8.25%, and "we will probably move up another notch," to 8.75% from 8.5%.
"That's 25 basis points a treasurer wouldn't want to pay, but if you look around the world, the situation is not that painful," he said.
Wall Street investment bankers are quick to note that even with the recent back up in yields, the benchmark Treasury long bond is still running below average. And if financial managers expect rising rates to accompany a pick up in business activity, they will probably want to lock in a lower cost of funds now.
Between September 1990 and February 1991, the 30-year Treasury dipped to just below 8% from 9.03%. Over the past 11 years, that yield has slipped below the 8.5% mark less than one-fourth of the time, according to Salomon Brothers Inc.
Such attractive rates have kept the new-issue market hopping, with volume running at about $69 billion so far this year, compared with $88 billion for all of 1990, according to Moody's investors Service. Market players expect issuance this month to reach $14 billion, up from $12.4 billion in June 1990.
"Right now, you're on the teetertotter," said Michael Bernstein, head of corporate trading at Donaldson, Lufkin & Jenrette Securities Corp., adding that issuance could evaporate with "any whiff" of inflationary pressures from a strengthening economy.
"People are reassessing where they are, but we continue to see things in the pipeline," he said.
What's more, corporate spreads remain relatively tight -- another lure for corporate borrowers.
By and large, yield differentials narrowed in May, according to Salomon Brothers. The finance sector tightened 10 basis points, lifting its total return to 0.95%, while industrials followed suit with a six basis-point narrowing that produced a 0.77% gain.
Spreads are long-term industrials now run at about 100 basis points, but won't stay there long if bond buyers start worrying that inflation is eating into their returns, traders say.
"There isn't much of a risk premium" on many corporate bonds, "which means many buyers aren't that worried about defaults," said DRI/McGraw-Hill's Mr. Rolley. Even so, "we don't look for these spreads to widen any time soon -- we could run this way for a while.
"Where we are is completely consistent with a mild recession. Cash flow is coming back ... and people expect quality borrowing," he said.
Others are less sure about just how robust the economy is.
"In one respect, we've missed the [financing] window: in another, maybe it hasn't opened yet," said George Ashur, director of corporate bond research at Chase Securities Corp. "Without a robust recovery there's no reason to raise rates, but it's not clear cut.
"There has been so much hanging over the market -- names that haven't issued in years," Mr. Ashur said. But as far as the economy goes, "I'm still on the pessimistic side, so rates should logically drop a bit" and keep issuance rolling.
Yesterday's Market
Still smarting from Friday's stronger-than-expected employment data, investment-grade corporate bonds marked time as traders and issuers regrouped.
Long-term high grades wound down a sluggish session with little change, holding their spreads to Treasuries. Junk bonds, too, barely budged.
In the new-issue market, Tandy Corp., the Texas-based electronics company, made its asset-backed debut with $350 million of credit card securities. The deal, which had been expected to hit the market Friday, had been pushed back by the jobs report.
Working through First Boston Corp., a special issuing vehicle, Tandy Master Trust 1991-A, offered the four-year securities as 8 1/2s to yield 95 basis points over the interpolated three- and five-year Treasury notes.
With the help of a 22% subordinated piece, the issue carries top-flight triple-A ratings from the major agencies.
