Companies are set to borrow $74 billion in the investment-grade bond market this week. That’s the most for a week since records began in 1972. The issuers include Coca-Cola (KO), Walt Disney (DIS), and Apple (AAPL).
At least another $50 billion in corporate bond issuance is projected for the rest of September.
With more than $16 trillion in bonds in Europe and Asia paying negative yields, corporate offerings are an easy sell to yield-starved investors. For corporate issuers, the lure is obvious. With yields near all-time low, companies can raise new cash at very modest costs and refinance older bonds to generate big savings. The August rally in Treasury prices and the downturn in Treasury yields had pushed the average yield on an investment grade corporate bond below 3%.
The flood of corporate supply sent Treasury prices lower and Treasury yields higher as Treasuries had to compete with higher yielding corporate debt for buyers. The yield on the 2-year Treasury jumped as much as 14 basis points today, the largest full-day increase in a decade–before finishing the day up 11 basis points at 1.53%. The yield on the 10-year Treasury moved up 9 basis points to 1.56%.
I don’t see this drop in Treasury prices–the iShares 20 Year Plus Treasury Bond ETF (TLT) fell 1.81% today–running for very long. There are simply too many central banks cutting interest rates too aggressively for yields to move in any direction but down over the next few months. Central banks cut rates 32 times over the last 12 months for a cumulative 13.85% reduction in rates, according to the Bank of International Settlements. Interest-rate swap markets have priced in another 58 cuts over the next 12 month for another 16% reduction in global interest rates.
