The Demand for Everything Is Just Nuts
The longer that interest rates and credit spreads continue to generate historically low all-in yields, the more asset managers will stray from their traditional investment allocations.
When a seasoned Wall Street bond trader who has been through multiple bull/bear markets exclaims, "The demand for everything is just nuts!" one has to pay attention. The Morningstar Corporate Bond Index only tightened 1 basis point last week to an average spread of +137, but we suspect that our index is lagging the rally in corporate bonds and the clearing level for many infrequently traded bonds is tighter than where the pricing services are marking bonds.
As earnings season reached a crescendo with the peak number of firms reporting results and exiting their quiet periods, the new issue bond market sprang back to life. Of the issuers we cover, more than $26 billion of new issues were priced, the fourth-highest weekly volume this year and $10 billion higher than the weekly average. This volume was quickly absorbed and new issues generally traded 3-5 basis points better by the end of the week. In addition to the new issue volume priced last week, Apple (AAPL) (AA-, narrow moat) announced that it would issue as much as $50 billion of debt through the end of 2015 to partially fund a new share-buyback program. We have not heard indications of size or timing on a new issue yet, but considering the company has already received ratings from the rating agencies, we suspect it will be in the market sooner rather than later. Apple's intentions mirror one common theme on earnings conference calls: Equity analysts have consistently questioned management's intentions to issue bonds at these historically low rates to buy back stock. We suspect the new issue market will be especially busy for the next few weeks.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.