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From cosmetics to coffee machine makers, roughly a dozen companies raced into the U.S. investment-grade corporate bond market to borrow on Monday, after last week’s surprise jump in Treasury yields hit a calm patch.
Beauty and fragrance giant Estée Lauder Cos. EL, +2.83%. and Keurig Dr Pepper Inc. KDP, +1.21% were among the batch of companies looking to raise fresh debt Monday in the largest part of the roughly $10.5 trillion U.S. corporate bond market, as Treasury yields took a breather from their recent sharp rise.
Debt investors responded to the slate of new corporate bond offerings by piling in orders, particularly given the shot at earning slightly meatier yields than they have been accustomed to in the past year of pandemic.
“They are getting a ton of demand,” said Tom Murphy, Columbia Threadneedle Investments’ head of investment grade credit, of the new bond deals. “The point is yield buyers want higher rates, but also stable rates.”
Estee Lauder was able to borrow $600 million by selling 10-year debt rated A1/A+ at a spread of about 57 basis points above the risk-free 10-year Treasury TMUBMUSD10Y, 1.426% rate, according to a person with direct knowledge of the dealings. That equates to a coupon of about 1.95%.
Initially, bankers pitched investors a spread, or premium, of about 80 basis points above Treasurys on Estee Lauder’s bonds, but pricing narrowed as demand for the bonds picked up. Lower spreads often are indicative of high demand or a more bullish market tone.
Pricing on Keurig’s 3-part $2.15 billion Baa2/BBB rated bond deal also narrowed, with the company saying it plans to use proceeds to redeem and repay debt, including a loan facility slated to mature in Feb. 2023.
The yield on the ICE BofA U.S. Corporate Index jumped to 4.7% last March during the brunt of the pandemic-induced selloff, but lately has been hovering closer to 2.1%.
The Federal Reserve has vowed to keep rates ultra low and credit flowing until the economy can recover from the pandemic. But last week, markets pushed back against the Fed’s low-rate policy, sparking a “tantrum” in longer-term Treasury rates, with the 10-year suddenly soaring to 1.6%, before pulling back to 1.46% Friday and holding near 1.44% Monday.
“I think we’re going to see that the volatility we saw last week probably is going to continue throughout the year, not only in the bond market, but in the equity market in general,” Duke Laflamme, chief investment officer at Eaton Vance WaterOak Advisors, told MarketWatch.
Laflamme pointed to additional fiscal stimulus, rising inflation expectations, but also a healing economy as likely culprits of rates volatility this year, but he also doesn’t expect those forces to spark any extreme market corrections.
“If you’re a company and looking to issue debt, you’re probably going to want to get that in before there is a further rise in rates or credit spreads widen,” he warned.
On the plus side, higher interest rates, and yields, could bring back more steady hands to the corporate bond market.
While individual investors that buy exchange-traded funds (ETFs) with corporate debt exposure have become a more significant part of the fixed-income investor landscape, Murphy at Columbia said it’s still pension funds and insurance companies that typically account for roughly 45% to 50% of the investment-grade corporate bond market’s investor base.
“They haven’t been the most active players,” he said, pointing to ultra low yields across fixed-income after the Fed last March slashed benchmark rates to 0% to 0.25% and restarted a $120 billion per month bond buying program, to keep credit flowing during the pandemic.
“But they should be more active now,” Murphy said.
The large $45.3 billion iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, +0.10% closed 0.1% higher Monday, while the Dow Jones Industrial Average DJIA, +1.95% added 2% and other major stock benchmarks gained 2.4% to 3%.
Read: As rising Treasury yields spook stock investors, March looms like a lion
