High-grade bond issuance dropped
Primary market issuance was muted in the week ending August 1, with issuance volumes dropping by 65% over the prior week. A total of $7.6 billion was issued over 11 transactions in the investment-grade bond (LQD) market. Last week marked the lowest weekly issuance volume in the whole of 2014, bringing total issuance to ~$873 billion year-to-date (or YTD) in 2014 (Source: Bloomberg).
With the earnings season in full swing, issuance levels have fallen over the past few weeks. A number of corporate borrowers are subject to blackout periods preceding their quarterly earnings releases.
The fundraising theme for most issues appeared to be paying off older and costlier debt and general corporate purposes. Floating rate note issuance accounted for about 11% of issuance, with the balance issued on a fixed rate basis. Only two issuers hit the market with floating rate notes—PNC Bank, at $300 million, and Tyco Electronics, at $500 million.
Issuance by sector
Financial sector borrowers dominated and accounted for over 50% of issuance in seven deals. The largest issue among them was Credit Suisse’s (CS) $1.5 billion two-part issue. Other financials sector borrowers included Citigroup at $750 million, Kilroy Realty at $400 million, and Northern Trust Corp. at $400 million.
The World Bank’s $1.75 billion two-year issue was the largest deal in the week. Other major high-grade borrowers included Tyco Electronics at $1 billion, EQT Midstream Partners LP at $500 million, and Air Products & Chemicals (APD) at $400 million.
What are investment-grade bonds?
Investment-grade bonds are rated BBB- and above, according to the Standard & Poor’s ratings system. Higher ratings imply lower credit or default risk, while lower ratings imply the opposite. Since investment-grade bonds are deemed to have lower credit risk compared to high-yield bonds, the rates of interest that borrowers pay are also commensurately lower.
The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invests primarily in investment-grade bonds issued by U.S. corporate borrowers. LQD has holdings in large cap companies like Goldman Sachs and Verizon Communications. Both companies are also part of the S&P 500 Index (SPY). The iShares Core Total U.S. Bond Market ETF (AGG) primarily invests in investment-grade bonds, issued by both corporates and the U.S. Treasury.
Secondary market activity
In the next section, you’ll find an analysis of secondary market trends including returns on high-grade bonds and investor flows into high-grade mutual bond funds. Please continue reading the next section in this series.