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Investors Have Issues With Corporate America's New Bond Issues

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For years, investors have gorged on corporate debt. Now they’re showing signs of being full.

Fewer orders are coming in for new bonds, relative to what’s for sale. Companies that sell notes are paying more interest compared with their other debt, according to data compiled by Bloomberg, and once the securities start trading, prices by one measure have been falling about half the time. It’s the latest signal that the investment-grade debt market is losing steam after years of torrid gains, as rising rates and talk of tariffs weigh on the outlook for corporate profit.

“Investors are starting to be a little more disciplined,” said Bob Summers, a portfolio manager at Neuberger Berman, which manages about $130 billion of bonds. “They aren’t just waving in every deal now.”

(Related: Dead Malls Are Alive and Well in Wall Street’s CLO Debt Machine)

Money managers’ restraint amounts to more pain for companies. The average yield on corporate bonds is around its highest levels since January 2012, according to Bloomberg Barclays index data. Even with CVS Health Corp.’s $40 billion issue last week, sales volume for new investment-grade corporate debt is at its lowest level so far this year since 2014.

Outflows from mutual funds and exchange-traded funds, coupled with reduced corporate bond-buying have created a tough first quarter for investment-grade bonds, said Yuri Seliger, a credit strategist at Bank of America Corp.

“The negatives are winning out right now,” Seliger said.

Campbell Soup

Take Campbell Soup Co., which sold $5.3 billion of bonds this week to fund its planned acquisition of snack-maker Snyder’s-Lance Inc. Typically, bankers start selling the deal to investors at a relatively high yield compared with Treasuries, which they decrease as demand increases. In this case for the biggest parts of the deal, they never did, and the bonds weakened relative to Treasuries after they were sold.

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That’s been a problem for new issues in general this month. While companies often get orders for three or four times as many bonds as are for sale, at the beginning of the week order books were barely two times covered, Bloomberg data show. Borrowers paid yields that were an average of 0.11 percentage points higher on new deals compared with their existing securities last week, a new issue concession much higher than the 0.013 percentage point-average for the year. And yields relative to Treasuries weakened on more than half of new issues on Monday and Tuesday, according to data from Bank of America Merrill Lynch.

Buying Opportunity?

Not all bond deals are faltering. McDonald’s Corp. sold $1.5 billion of bonds Wednesday, in a transaction drawing four times more orders than securities for sale. It cut yields on all three parts compared with initial expectations, according to a person with knowledge of the matter, who asked not to be identified as the details are private. Spreads on the three parts had narrowed as of Thursday’s close in New York.

For some investors, the recent weakness presents a buying opportunity as companies continue to generate strong cash flow, helped by tax cuts, said Tom Murphy, head of investment-grade credit at Columbia Threadneedle Investments.

“If fundamentals are unchanged and spreads are wider, shame on us if we’re not buying securities,” Murphy said. “You’re supposed to start taking some bites of the apple here.”

There are signs that fundamentals are shifting. The Federal Reserve is expected to lift rates three more times this year. U.S. retail sales fell in February for the third straight month, and consumer credit growth is slowing.

Any slowdown in corporate bond purchases comes after years of surging demand. The market value of investment-grade corporate notes has more than doubled over the last 10 years, as investors have snapped up new debt, while the economy has grown by about a third. Even if demand is showing signs of abating now, it’s not disappearing entirely.

“Deals are being squeezed,” said Greg Nassour, co-head of investment-grade portfolio management at Vanguard Group. “But they’re still getting done.”

— Read Blackstone Is Building Risk Analytics as Part of Insurance Push on ThinkAdvisor.