Corporate bonds slump despite big CVS debt sale
Wall Street’s bankers have made a fortune from funneling trillions of dollars of corporate America’s bonds into investors’ portfolios, a party that continued this week with CVS Health Corp.’s $40 billion debt sale.
U.S. investment-grade corporate bonds are one of the worst-performing of the major asset classes so far this year, hurt by rising rates and investor fears that trade wars will hamper company profits. Bond offerings are slowing, and banks are earning some of the lowest fees on record, in percentage terms, to underwrite the debt.
Investment-grade bonds have returned negative 2.7 percent so far this year, the worst start for the asset class in decades, Bloomberg Barclays index data show. Rising interest rates — and the fear of more rate hikes to come — are mostly to blame, with the yield on the 10-year U.S. Treasury note jumping almost half a percentage point since the end of 2017. Given its small coupons, the high-grade market is extremely sensitive to rate movements.
Slower issuance, weaker returns, and lower underwriting fees are all a reversal of the past decade of easy money. For five straight years, companies have sold record amounts of U.S. investment-grade debt. Corporations borrowed to buy rivals, pay dividends, and buy back shares, and investors were willing to tie up their money for decades to fund it all.
The debt binge was profitable for Wall Street, which earned an estimated $7 billion of fees from underwriting U.S. investment-grade bonds last year and $6.9 billion the year before, according to data compiled by Bloomberg. While the fees in percentage terms dropped to near all-time lows, the ballooning volume of issuance made up for any missed banking profits.
Unfortunately, only one part of that trend is continuing: underwriting fees have continued to drop this year. But companies aren’t selling nearly as much debt, with investment-grade bond sales on pace for the slowest start to a year since 2015.
Even including the behemoth CVS deal, the $287.2 billion of the notes sold so far in 2018 through Thursday compare with $335.3 billion in the same period last year, Bloomberg data show. Morgan Stanley forecasts that issuance would drop 3 percent this year compared with last.
“Companies that have utilized the debt markets as their own piggy bank aren’t necessarily doing so anymore unless they need to,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC.
The CVS sale on the surface went well. Aimed at financing the drugstore chain’s $67.5 billion takeover of health insurer Aetna Inc., the offering drew three times as many orders as bonds available to sell. The debt rallied immediately after the close of Tuesday’s sale, rewarding investors with nearly $450 million come Wednesday if they were able to grab of piece of the action.
Still, the company had to offer discounts on seven of the nine portions to entice buyers. The day after the sale was completed, CVS was paying an average coupon of 4.12 percent on all its debt compared with 3.95 percent a year earlier, Bloomberg data show.