Yields on long-term investment grade corporate bonds haven't been this low since Woodstock.
According to John Lonski, senior economist at Moody's Investors Service, the last time the average yield on Moody's index of long-term investment grade corporate bonds hit such levels was August 1969. As of Monday, the index's average yield was 7.33%, he said.
Lonski cited "extraordinary private sector borrowing restraint" as a key reason for the decline.
In fact, the restraint may have had more to do with the decline in overall bond market yields than the budget deficit reduction plan, which still involves many uncertainties, Lonski said.
During the first two years of the recovery, March 1991 to march 1993 recovery, net corporate sector borrowing represented only about 63% of what the federal government borrowed, Lonski said.
While corporate issuance has been brisk, the focus has been on refinancing, he said, not on borrowing new money.
By comparison, during the first two years of the 1983 to 1990 recovery, private sector indebtedness grew by 227% relative to the increase in Federal debt, Lonski said.
The current low borrowing costs have apparently not been lost on issuers.
Roughly $24 billion of corporate debt was sold in July, and Lonski expects another $20 billion or so this month despite the Treasury's quarterly refunding and August's popularity as a vacation time.
While Lonski still thinks "we are running out of room on the downside," borrowing costs are expected to remain low for the near-term as the economy continues to "plod along throughout the remainder of the third quarter."
"I think [corporate issuers] have a bit of time," he said.
Lonski said the Treasury Department's quarterly refunding along with Thursday's producer price index and Friday's consumer price index could present potential hitches this week.
A poor refunding, a 0.4% or more rise in the core CPI, and a 0.3% or better rise in the core PPI could trigger a Treasury selloff that would dampen demand for long duration securities and add 15 to 20 basis points to new corporate issues of 10 years or better, he said.
But Lonski believes the brisk new issue pace will continue regardless of what happens this week. Even an increase in borrowing costs could see the more risk-averse issuers come to market, he said.
"Some [issuers] will respond defensively," Lonksi said.
All in all, it would be hard to imagine anything interrupting the year's current record pace of bond offerings, he said.
Yesterday, more than $2 billion of investment grade corporate bonds were priced, syndicate desks said.
In secondary trading, spreads on high-grade issues remained unchanged.
"Actually we are keeping a good healthy pace, it's not the August of the past," one trader said of activity. High-yield issues ended 1/4 point lower in slow trade as the market eyed a heavy new issue calendar.
New Issues
Aetna Life & Casualty issued a two-par offering totaling $400 million. The first tranche consisted of $200 million of 6.375% notes due 2003. The noncallable notes were priced at 99.308 to yield 6.47% or 70 basis points more than when-issued 10-year Treasuries.
The second piece consisted of $200 million of 7.250% debentures due 2023. The noncallable debentures were priced at 99.974 to yield 7.252% or 80 basis points more than the current 20-7.125% Treasuries of 2023. Moody's rates the offering A1, while Standard & Poor's rates it AA-minus. Goldman, Sachs & Co. lead-managed the offering.
Citicorp issued $350 million of 6.75% subordinated notes due 2005 at par. The noncallable notes were priced to yield 98 basis points over when-issued 10-year Treasuries. Moody's rates the offering Baa2, while Standard & Poor's rates it BBB-plus. Goldman, Sachs & Co. was lead-manager.
Virginia Electric and Power Co. issued $200 million of noncallable first and refunding mortgage bonds through competitive bidding.
The first tranche consisted of $100 million of 6% bonds due 2001 at par. The noncallable bonds were priced to yield 37 basis points more than the Treasuries 7.875% Treasuries of 2001. A group led by Merrill Lynch & Co. won competitive bidding to underwrite the offering.
Part two consisted of $100 million of 6% bonds due 2002. The noncallable bonds were priced at 99.197 to yield 6.117% or 37 basis points over the 6.375% Treasuries of 2002. A group led by Morgan Stanley & Co. won competitive biding to underwrite the offering.
Moody's rates the offering A2, while Standard & Poor's rates it A.
Kansallis-Osake-Pankki issued $200 million of 6.375% senior notes due 2000. The noncallable notes were priced at 99.804 to yield 6.41% or 100 basis points over seven-year Treasuries. Lehman Brothers served as lead-manager of the offering. Moody's rates the offering Aa3, while Standard & Poor's rates its A.
Federal National Mortgage Association issued 4200 million of medium-term notes due 2003 at par. The notes were priced to yield 47 basis points over when-issued 10-year Treasuries. Merrill Lynch acted as sole-manager of the offering.
Federal National Mortgage Association issued $200 million of 4.25% step-up medium-term notes due 1998. The notes were priced initially at par to yield 30 basis points over five-year Treasuries. They have a 5.433% internal rate of return. The notes are noncallable for a year, after which the coupon steps up to 5.77%. Goldman Sachs sole-managed the offering.
Duke Power issued $200 million of 6.875% first and refunding mortgage bonds due 2023. Noncallable for five years, the bonds were priced at 97.125 to yield 7.108% or 71 basis points over when-issued 30-year Treasuries. A group led by Kidder, Peabody & Co. won competitive bidding to underwrite the offering. Mood's rates the offering Aa2, while Standard & Poor's rates it AA-minus.
Chase Manhattan issued $200 million of 6.75% subordinated note due 2008. The noncallable notes were priced at 99.58 to yield 6.795% or 103 basis points over when-issued 10-year Treasuries. Moody's rates the offering Baa2, while Standard & Poor's rates it BBB-plus, Lehman Brothers served as lead-manager of the offering.
Dow Chemical issued $150 million of 6.85% debentures due 2013. The noncallable debentures were priced at 99.5 to yield 6.896 or 50 basis points more than the when-issued 30-year Treasury bonds. Moody's rates the offering A1, while Standard & Poor's rates it A. Merrill Lynch & Co. was lead-manager of the offering.
Outdoor Systems Inc. issued $115 million of 10.75% senior notes due 2003 at par. The notes are noncallable for five years. Moody's rates the offering B2, while Standard & Poor's rates it B. Bear Stearns & Co. served as lead-managers of the offering, which was increased from $105 million.
