Article 4.1 Global corporate bond issuance at lowest level in five years

By Ralph Atkins

Financial Times August 25, 2013

Global corporate bond issuance has this month fallen to the lowest level in five years as market turmoil triggered by rising US Treasury yields persuades compa­nies worldwide to shelve funding plans.

Just $61bn in investment grade corporate debt has been raised so far in August. In August last year, more than $121bn in new corporate debt was issued.

The slowdown follows the US Federal Reserve's announcement that it would slow the pace of its asset purchases, or ‘quantitative easing‘, from as early as next month.

Ben Bernanke, Fed chairman, first hinted at his QE ‘tapering' plans on May 22. Since then the yield on 10-year US Treasuries has risen to more than 2.9%, compared with a low of 1.61% at the start of May. Higher bond yields, which move inversely to prices, have left investors nursing losses on the value of their portfolios.

‘What has been worrying people has been the speed and abruptness of moves. It has made people more nervous,' said Bryan Pascoe, global head of debt capital markets at HSBC.

In the first months of this year, corporate bond issuance was running at a rapid pace as companies took advantage of historically low interest rates. A high water mark was reached in April when Apple, the US maker of the iPhone, sold bonds worth $17bn. But since May, weekly data show global corporate debt issuance tumbling. The steepest decline has been in emerging markets, where bond and equity markets have seen sharp price falls in recent weeks as investors have withdrawn capital.

However, bankers pointed out that US corporate bond issuance had remained relatively strong, with debt markets buoyed by investment flows returning from emerging markets. They also attributed the slowdown in Europe to a return to a more normal summer lull - after several years in which companies have felt compelled to issue whenever conditions were relatively favourable. Companies that have issued bonds this month have included Viacom, Royal Dutch Shell and China's Wuhan Iron & Steel Group.

FT

Source: Atkins, R. (2013) Global corporate bond issuance at lowest level in five years, Financial Times, 25 August.

Some ‘corporate bonds' are in fact issued by business enterprises owned by a government. Also, the biggest issuers are banks and other financials rather than non-financial commercial corporations. An important sub-set of corporate bonds are the utilities, including telecommunication companies, water, elec­tricity and gas suppliers. Because these are often regulated by a government agency they may have a different risk/return profile to bonds from standard industrials (manufacturers and service companies).

Trading of bonds

While the government bond markets in developed economies are very liquid, with single government bond issues raising billions and with thousands of investors trading in the market, by contrast corporate bond market activity can be very low. Companies may raise merely millions of pounds/dollars in an issue, and most investors buy and hold to maturity rather than trade in and out. Some companies issue bonds on a regular basis, every few months or years, each with its own coupon and terms, thus there might be a dozen bonds for one company and tens of thousands of different corporate issues in the secondary market place. The wide range reduces the market depth for any one issue. This means that an investor might not be able to buy or sell particular bonds because there is none being traded - see Article 4.2.