Must-know: An investment-grade bond update (Part 2 of 8)
2014 investment-grade bonds review
High-grade corporate bond (LQD) issuance surged to $801.6 billion in the first half of the year, with issuance volumes of $416.3 billion and $385.3 billion in the first quarter and second quarter, respectively. Issuance got a boost in 2014, with yields near record lows, as borrowers flocked to debt markets for all sorts of reasons ranging from tax-planning and mergers and acquisitions (or M&As) to refinancing costlier debt and share buybacks (Data source: Bloomberg).
June leads with most number of issuers, tranches this year
The month of June saw the second highest monthly volume in 2014 with $143 billion issued by 127 borrowers. Issuance was highest in January at $157.9 billion. Apple’s $12 billion notes in April was the largest transaction in 1Q14, followed by Oracle’s $10 billion offering made last week. June also recorded the highest number of issuers and tranches at 127 and 187, respectively.
Deals and volumes in the week ending July 4
In a four-day week shortened by the July 4 Independence Day holiday, weekly investment-grade bond issuance managed to top $20 billion for the 20th time this year. Despite the short week, issuance volumes in the week ending July 4 were up by ~6% compared to the previous week. Total issuance in the week ending July 4 came in at $20.45 billion helped by the second largest investment-grade corporate bond issue of the year.
Oracle issue dominates primary market activity
Database software company, Oracle (ORCL) came out with a $10 billion issue on June 30, which was almost 50% of the weekly issuance. The company plans to use part of the proceeds from the bond sale to finance its acquisition of enterprise solutions company, MICROS. Barring Apple’s $12 billion bond sale in April, Oracle’s (ORCL) issue is the largest this year. Both Apple and ORCL are part of the SPDR Technology Select Sector ETF (XLK) and the Vanguard S&P 500 ETF (VOO).
We’ll discuss Oracle and other high profile primary market issues—including those of Goldman Sachs and Anadarko Petroleum) which came out last week—in Part 4 of this series.
Last week marked the lowest number of issues in 2014
Despite the healthy issuance levels, only eight issuers priced transactions in the primary market across 18 tranches. The number of issuers was the lowest weekly level in 2014. Last week brought the total issuance to ~$807.3 billion in 2014 year-to-date (or YTD).
What are investment-grade bonds?
Investment-grade bonds are rated BBB- and above, as per 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 lower. The Vanguard Total Bond Market ETF (BND) primarily invests in investment-grade bonds, issued by both corporates and the U.S. Treasury.