US companies may sell as much as $80 billion of debt in September, nearly 30 percent more than year-ago volumes, after a pause in the Federal Reserve's interest rate hikes made investors more comfortable with credit risk.
Strong demand from foreign buyers and creators of structured financial products is also helping companies easily sell debt this year despite worries about a slowing economy, inflation and high energy costs, investors said.
"There's been a tremendous overseas bid from foreign central banks and foreign private investors," said Robert Bishop, portfolio manager for Seneca Capital Management in San Francisco.
New banking regulations known as Basel II that go into effect overseas in January are also making corporate bonds more attractive to European investors, he said. The new regulations will require less capital reserves for some high-quality corporate bonds than in the past.
Corporate bond issuance is already on track to easily beat the record $689 billion sold in 2004. Year to date, companies have sold about $550 billion of debt, compared with $454 billion for the first eight months of 2005, according to Thomson Financial.
Bond sales normally taper off for late summer vacations and gather speed in September as companies take advantage of an issuing window ahead of the Thanksgiving and Christmas holidays. Bank of America estimates that $70 billion to $80 billion of supply could hit the market next month.
The pace of issuance picked up last week after the Fed held interest rates steady, breaking a string of 17 consecutive rate increases in its bid to head off inflation.
Companies including Merrill Lynch, CVS Corp and Liberty Mutual Group Inc sold more than $20 billion of debt last week, most of it after Tuesday's rate decision. "They're comfortable that the Fed is done ... and that rates are going to stay stable for the foreseeable future on the front end," said Bishop.
Though August is normally a slow month, it could surprise to the upside, with more than $50 billion in corporate debt, said Vincent Murray, head of the investment-grade syndicate at LaSalle Capital Markets. About $36 billion had priced through the end of last week, according to Thomson Financial.
From investors' view, the Fed pause relieved worries that too much liquidity would be drained from the financial system, hurting growth, consumer spending and corporate profits.
"Credit quality remains relatively robust and the concerns around a substantial uptick in defaults, I think, are relatively low," said Robert McAdie, head of global credit strategy for Barclays Capital.
Oil exporting countries benefiting from high energy prices and Asian investors looking for higher yields than they can find domestically are supporting demand for US corporate debt, strategists said.
Foreign investors in the first quarter became the biggest owners of US corporate debt, a position long held by the insurance sector, according to research service CreditSights. As of March, offshore investors owned 25.7 percent of the market, versus 25.2 percent for insurers, CreditSights said. Not everyone finds the recent new corporate issues attractive, however.
"We've not been big buyers of longer-dated corporates," said Dan Sheppard, a director at Deutsche Bank Private Wealth Management. "I continue to expect some spread widening. I'm expecting that because I think the economy may slow a little more than is currently anticipated in the corporate market."