Verizon carried off Tuesday the biggest corporate bond sale in history, with most if not all of the $49 billion in proceeds funding its $130 billion acquisition of Vodafone’s Verizon Wireless stake, while the bonds themselves will go to investors hungry for investment-grade credits—including those holding the ETF market’s biggest and most liquid funds.
By and large, investors seemed eager to jump into the deal, with massive orders coming in thanks in part to the bonds’ attractive yields relative to comparable U.S. Treasurys. USA Today reported that Verizon’s 10-year bonds would yield about 5.2 percent, which compares with a 10-year Treasury yield of just under 3 percent. It sold $11 billion in 10-year notes, as well as a slew of other maturities.
That demand should also find its way to corporate bond ETFs. The iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | B-64), a $19.5 billion portfolio comprising investment-grade corporate debt and the most popular ETF in the segment, is a good example of investor appetite for high-quality corporate paper even in a year when LQD has bled assets and shed nearly 5 percent of its value.
With a weighted average maturity of nearly 12 years, LQD’s yield to maturity is still more than 3.6 percent, according to data generated by IndexUniverse’s ETF Analytics unit.
“Corporate bond ETFs continue to have appeal because defaults aren’t expected to pick up in the near term, while interest-rate risk uncertainty is sky high,” said Gene Koyfman, vice president of Research at IndexUniverse, who specializes in debt funds. “Investors are willing to trade off the risk of rising rates for credit risk to generate some yield from their bond holdings.”
The timing of Verizon’s offering, which included a variety of bond maturities such as three-, five-, seven-, 10-, 20- and 30-year bonds, might be propitious if not intentional, as the company takes on a massive amount of debt right before the Federal Reserve is expected to kick off the tapering of quantitative easing.
The Fed meets next on Sept. 18, when many expect it will announce the beginning of the tapering of its massive monthly bond purchases, meaning higher interest rates—and borrowing costs—are likely to follow. Indeed, yields on 10-year Treasury-notes have already doubled this year since the Fed taper talk began in May.
“The Verizon bond offering has less to do with the tapering and more to do with raising funds to buy out Vodafone’s interest in the company,” Koyfman said.
Still, he noted that the size of the bond offering is a big deal for ETF investors, because it should impact sector exposure in major corporate credit indexes, and ultimately the ETFs that track them.
“Right now utilities make up about 11 percent of the Barclays Corporate Index, but Verizon’s bond issue will push that allocation higher once they find their way into the index in the next rebalance date,” he said.
“The bonds won’t make it into the index until the first of the next month,” Koyfman said. “However, I suspect many managers who track indexes that include corporate bonds will be buying the bonds ahead of the rebalance and risk some tracking error.”