U.S. corporate bonds issued in October are rallying in a sign that credit markets may be recovering after the worst month for investment-grade debt in more than 28 years.
Prices on bonds sold by International Business Machines Corp., PepsiCo Inc., Diageo Plc and Verizon Communications Inc. climbed as much as 10.8 percent since they were issued in October, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.
Investors willing and able to buy corporate debt last month scooped up top-rated bonds on the cheap as companies offered record yields over benchmarks. Gains on the newly issued debt may help draw demand from more buyers, helping pry open a market that's been all but shut since mid-September, said Jim Shirak, lead fixed-income strategist at Boyd Watterson Asset Management.
``We're thinking these levels at such wide spreads still represent value,'' said Shirak, whose Cleveland firm manages $3 billion in fixed-income assets and bought IBM's 30-year bonds in October. Even if yields over benchmark rates stop rising, he said, investors can ``make a lot of money.''
IBM sold $4 billion of five, 10- and 30-year debt on Oct. 9, a record amount for the Armonk, New York-based company, according to data compiled by Bloomberg.
The $1.6 billion of 7.625 percent, 10-year notes traded at 109.68 cents on the dollar to yield 6.3 percent as of yesterday, according to Trace. That amounts to a 10.1 percent return, compared with an average loss of 0.917 percent for investment- grade bonds in the same period, according to Merrill Lynch & Co. index data.
PepsiCo, Verizon
Purchase, New York-based PepsiCo's 7.9 percent notes due in 2018 have risen to 110.55 cents on the dollar as of yesterday, from 99.758 cents when they were issued Oct. 21, for a return of 10.8 percent.
The 8.75 percent notes due in 2018 issued Oct. 30 by New York-based Verizon, the second-largest U.S. phone company, rose 4.9 percent to 104.28 cents on the dollar as of yesterday, Trace data show. Investors who bought 7.375 percent notes due 2014 from London-based Diageo, the world's largest liquor company, earned a return of 4.1 percent as of yesterday, based on prices from Trace.
The gains are likely to entice other issuers into the market, said Rob Kay, head of Credit Suisse Group Inc.'s investment-grade syndicate in New York.
``When people see these transactions that came at the height of the volatility doing extremely well, it gives other issuers a green light that they can get involved,'' he said.
Yesterday, AT&T Inc. of Dallas, the largest U.S. telephone company, and New York-based cigarette maker Philip Morris International Inc. led $4.2 billion in bond sales, the biggest day in 10 weeks.
`Difficulty in Reacting'
Many investors racked by losses aren't ready yet to buy corporate bonds, said Jack Malvey, a fixed-income strategist at Barclays Capital in New York.
``There are all sorts of very high-quality specimens within the bond market that have great value, but there's difficulty in reacting given the difficult performance in 2008 for so many types of investment categories,'' he said Nov. 11 in a Bloomberg Radio interview.
The average total return on investment-grade corporate bonds was a 7.38 percent loss in October, the worst month since a 7.356 percent decline in February 1980, Merrill data show.
Yields on investment-grade company debt rose to a record 6.18 percentage points more than Treasuries as of Oct. 29, from 3.44 percentage points on Sept. 12, before Lehman Brothers Holdings Inc. filed for bankruptcy, Merrill data show. Lehman's collapse on Sept. 15 heightened concern that more of the largest financial companies may fail. Spreads narrowed to 5.87 percentage points as of yesterday.
October Sales Plummet
The new issue market ground to a near halt as Lehman's bankruptcy drove investors to the safety of government debt. Sales plummeted to $24 billion in October from $107 billion in the same month last year. For the year, sales were $725.6 billion compared with $1.05 trillion in the same period in 2007.
Bond prices tumbled in October amid a wave of forced selling by money managers honoring redemptions from investors. Borrowers that ventured into the new issues market amid the tumult in September and October paid yields that were about 1 percentage point higher than where their existing debt was trading at the time of issue, Kay said. That translates into extra interest of about $10 million a year on a $1 billion deal.
Investors demanded higher yields relative to existing debt last month to cover losses as the bonds they already held became cheaper as credit and equity markets deteriorated. In October 2007, companies typically paid a so-called new issue premium of about 0.15 percentage point, Kay said.
