Corporate Bond Markets Move In Advance Of Further Interest Rate Increases

by: John M. Mason

"Companies were able to issue more than $180 billion worth of debt in the past four weeks, according to Dealogic, up 25 percent from the same month last year."

According to Michael Stothard and Vivianne Rodrigues in the Financial Times, "Companies borrowed more money than in an other January on record."

In the United States, for example, deal volume in January 2013 was 71 per cent higher than it was in 2012. For the eurozone, deal volume was up 17 percent.

This seems, to some, to be the culmination of the massive issuance activity in global bond markets during the last four months of 2012.

Two reasons seem to explain the volume, the low cost of debt and "the fear that it may never be this good again." There is fear that the strength of the market may be going away.

I addressed this latter issue in yesterday's blog post, "A Coming "Rout" in US Government Debt?"

To some, the die has already been cast. The yield on 10-year US Treasury bonds has risen 50 basis points since July. The yield on 10-year German Bunds has risen 30 basis points since early December.

Note that this increase has taken place despite the fact that the Federal Reserve continues to execute its latest round of quantitative easing. The reason for the increase seems to be a movement in international funds from "safe haven" sovereign investments to issues that carry a higher risk.

Stothard and Rodrigues write, "Bond prices have already started to fall in recent weeks after months of strong gains that pushed yields to all time lows."

The macro credit analyst at the Royal Bank of Scotland, Lee Tyyrrell-Hendry, argues "Credit investors have been fed a large diet of new corporate issuance over the last months. Now we think they are starting to get indigestion and will take a pause."

This could mean that the volume of new bond issues may not be as robust in the rest of 2013. Analyst's ague that there do not seem to be any other major economic reasons for corporations to raise more funds in the year. Economic growth will remain meager. Merger and acquisition activity is not expected to be strong. Furthermore, the drive of many corporations to build up cash hoards over the past two years has seemed to lessen as the possible uses of these funds has diminished.

Bottom line: if international investors continue to believe that world capital markets, especially those connected with European sovereign debt, are going to remain stable in the near future due to governmental efforts to resolve their financial issues, then funds, globally, should continue to move from less risky debt to more risky debt.

This, in my mind, will result in the yield of the 10-year US Treasury bond to rise by at least 50 to 75 basis points this year. This will probably mean that the yields on high-grade corporate debt will also rise, and will probably rise by more than Treasury yields will increase. And, these increases will happen even though the Federal Reserve keeps up it efforts of monetary ease.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.