US companies sold close to $28bn of bonds on Tuesday, taking advantage of a sharp decline in borrowing costs over the past month to load up on cheap debt.
Investment grade companies such as media giant Disney, tractor maker Deere & Co and construction equipment manufacturer Caterpillar were among more than 20 issuers tapping the market, according to people familiar with the deals and Bloomberg data.
Disney alone issued $7bn of bonds across six maturities on Tuesday. Its 30-year bond, the largest tranche at $2bn, sold for just 95 basis points above Treasury yields, compared with an average of 124bp for an index of 30-year corporate debt.
Other companies also took the opportunity to push out the average maturity of their debt by issuing longer-dated bonds.
CSX, the railway operator, raised $1bn in 10-year and 30-year bonds, in part to redeem debt due in October 2020. Deere & Co will use its $500m 30-year bond sale to help repay debt maturing next month. The bond sold at 95bp above Treasury yields.
Investors had piled into corporate debt in August amid a global bond rally, sending prices higher and depressing yields. The average yield in a broad index of investment-grade bonds calculated by ICE Data Services dropped from 3.21 per cent at the start of the month to 2.87 per cent at the end.
“This is a natural reaction to the bond market rallying so hard,” said Kevin Muir, a market strategist at East West Investment Management. “We are seeing companies taking advantage of that and borrowing.”
September is typically a busy month for bond issuance as bankers, investors and company treasurers return to their desks after a summer lull. This year it follows a particularly quiet period: just $84bn of new investment-grade bonds were sold in August.
According to Bank of America analysts, the 2019 year-to-date period is the lowest for issuance since 2014. Last week, they predicted that the next month would bring up to $130bn of new bond sales, with around $40bn this week alone, boosting issuance back in line with the average for the past five years.
The potential for new corporate fundraising has been helped by money flowing into investment-grade bond funds in recent weeks. Investors are trying to balance a desire for higher-yielding assets, following a dramatic fall in global sovereign bond yields, while remaining in relative safe areas of the market due to uncertainty over the trade war between the US and China and its potential impact on the US economy.
“There is definitely a huge amount of demand,” said Hans Mikkelsen, a strategist at Bank of America. “Foreign yields have collapsed. So foreign investors have no choice but to buy US bonds.”
This year, investment-grade bond issuance has tilted towards refinancing outstanding debt and away from funding acquisitions or stock buybacks, said Mr Mikkelsen.
“The dominant use of proceeds is refinancing now,” he said. “It’s what I would expect. Companies are not trying to add leverage. Now is the time to refinance into lower yields and extend the maturity of your debt.”