BofA sees US cor­po­rate-bond rally de­spite in­vestor worry

The Pak Banker - - COMPANIES/BOSS -

US in­vest­ment-grade bonds may fall to the cheap­est lev­els in more than seven months this year and fixed-in­come in­vestors are overly pes­simistic about the bal­ance sheets of cor­po­rate Amer­ica, ac­cord­ing to Bank of Amer­ica Corp.

The ex­tra yield that in­vestors de­mand to hold U.S. in­vest­ment-grade bonds over Trea­suries, or spread, may drop to 150 ba­sis points by the end of the year from 211 on Feb. 26, said Hans Mikkelsen, head of U.S. in­vest­ment-grade credit re­search at Bank of Amer­ica Mer­rill Lynch. The mea­sure last touched that level in July.

While is­suers stepped to the side­lines this year be­cause of in­creased volatil­ity, more pos­i­tive sen­ti­ment since midFe­bru­ary is help­ing spur sales and tighter yield pre­mi­ums, Mikkelsen said in an in­ter­view.

"There is a gen­eral sense among our in­vestors that cor­po­rate bal­ance sheets are late cy­cle and that lev­er­age ra­tios are sort of get­ting to the peaks we have seen his­tor­i­cally," Mikkelsen said. "I just take the op­po­site view of that."

US in­vest­ment-grade cor­po­rate bond sales have ex­panded for the past five years, and are up 18 per­cent so far this year to $253 bil­lion af­ter An­heuserBusch In­Bev NV sold a record $46 bil­lion of bonds to fi­nance its takeover of SAB­Miller Plc, ac­cord­ing to data.

The Chicago Board Op­tions Ex­change Volatil­ity In­dex jumped to 32.09 on Jan. 20, from 18.21 the end of 2015, as con­cerns about the global econ­omy in­ten­si­fied amid a rout in stocks and com­modi­ties trig­gered by wor­ries about the Chi­nese econ­omy. The in­dex closed at 17.7 on March 2, as oil prices sta­bi­lized and Chi­nese au­thor­i­ties work to calm in­vestor fears of a slow­down. An­a­lysts at Cit­i­group Inc. led by Stephen Antczak have also ex­pressed con­cern about the stop-start na­ture of the mar­ket, with about $570 bil­lion of ma­tu­ri­ties to get re­fi­nanced by year-end and a pipe­line of merg­ers and ac­qui­si­tions that need re­fund­ing.

Even with merg­ers and ac­qui­si­tions ex­pected to slow, Bank of Amer­ica ex­pects deals that have al­ready been an­nounced will sup­port mar­ket vol­umes this year, along with is­suance by banks seek­ing to boost their bal­ance sheets. Mikkelsen is fore­cast­ing $1.2 tril­lion of high-grade U.S. cor­po­rate bond sales this year, slightly less than last year's $1.3 tril­lion.

"Right now the mar­ket is wide open," Mikkelsen said. "There will be times again, ob­vi­ously, where sup­ply slows down. But I think that the kind of mar­ket con­di­tions we had at the be­gin­ning of the year -- I would think they are un­likely to re­peat."

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