Must-know: An investment-grade bond update (Part 4 of 8)
Tech firms set the tone for investment-grade bond records
The week ending July 4, only had eight issues in the high-grade corporate bond (LQD) segment. It was dominated by four major deals which accounted for over 90% of total issuance. Major issuers last week included Oracle at $10 billion, Goldman Sachs at $4 billion, International Finance Corp. at $3 billion, and Anadarko Petroleum at $1.50 billion, among others. Oracle, Goldman Sachs, and Anadarko Petroleum are part of the S&P 500 Index (VOO).
Oracle came out with a $10 billion, seven-tranche issue on June 30, which was also the second highest high-grade corporate bond issue of the year after Apple’s $12 billion bond sale in April, 2014. The seven-part issue included two floating rate note tranches, worth about $1.75 billion. The company plans to use the proceeds for funding its $5.3 billion acquisition of MICROS, refinancing existing debt, share repurchases, and other general corporate purposes.
Barring Apple’s $12 billion bond sale in April, Oracle’s (or ORCL) issue is the largest this year. Both Apple and ORCL are part of the SPDR Technology Select Sector ETF (XLK).
Goldman Sachs (GS) was the only issuer in the financial sector last week. The company sold $4 billion worth of notes in two tranches, $2.25 billion maturing in ten years, and $1.75 billion maturing in 30 years.
Secondary market trends
Investment-grade mutual funds recorded net inflows for the third consecutive week, with positive inflows of ~$1.9 billion in the week ending July 4. This represented an increase of ~27%, compared to the previous week. Year-to-date (or YTD) flows in investment-grade mutual funds up to July 4 were estimated at $44 billion (Source:Lipper).
Yields and spreads analysis
Effective yields on investment-grade corporate bonds (LQD), as measured by the BofA Merrill Lynch U.S. Corporate Master Effective Yield, increased by 12 basis points over the week ending July 4 to 3.07%. The Option Adjusted Spread (or OAS) as measured by the BofA Merrill Lynch U.S. Corporate Master Option-Adjusted Spread was unchanged at 108 basis points on July 4, as Treasury yields (IEF) also increased.
Due to the increase in yields, returns on investment-grade corporate bonds were negative last week, averaging -0.65%—as measured by the BofA Merrill Lynch U.S. Corp Master Total Return Index Value. The Index has increased by 5.13% this year, through July 4.
In the next section, we’ll discuss the highlights of last week’s auctions for one-month Treasury bills. Please continue reading the next section in this series.
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