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Sept. 6 (Bloomberg) -- Junk-bond sales are extending their lead over last year’s record pace in the U.S. as investors snap up debt that’s been beating investment-grade securities for the longest stretch in more than a decade.
Sprint Corp. raised $6.5 billion this week in the largest speculative-grade deal since 2008, leading $249.4 billion of issuance that is $44.8 billion ahead of offerings by this time last year, according to data compiled by Bloomberg. The gap has more than doubled over the past four months, putting sales on track to surpass 2012’s unprecedented $353.1 billion.
Junk bonds, which have returned more than high-grade notes for seven straight months, are getting a boost from buyers seeking securities that offer better protection from rising interest rates. The demand allowed Sprint to sell 63 percent more debt than the minimum target it set before the offering, a person with knowledge of the offering said Sept. 4.
“It’s a classic defensive play against rising interest rates,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., which oversees $350 billion, wrote in an e- mail. “It’s fared better than most fixed-income sectors and certainly better than investment grade.”
Junk bonds have outperformed investment-grade debt since February, the longest stretch since the seven months ended July 1999, Bank of America Merrill Lynch index data show. The securities have returned 0.84 percent during the period, compared with a 4.48 percent loss for high-grade notes.
Yields on 10-year Treasuries climbed yesterday to the highest since 2011 as a report showing fewer first-time jobless claims than analysts had forecast bolstered speculation the Federal Reserve will cut its unprecedented stimulus measures this month.
The benchmark borrowing rate has surged 1.4 percentage points to 2.99 percent since the start of May as Fed Chairman Ben S. Bernanke outlined a plan in which the central bank could start curtailing $85 billion in monthly bond buying later this year and end them around mid-2014 if growth is in line with the central bank’s estimates.
“There is a certain rush by issuers to raise debt before rates head too much higher,” Valeri wrote. “But all-in financing costs are still cheap even after the rise in rates.”
Elsewhere in credit markets, the market for corporate borrowing through short-term IOUs known as commercial paper contracted for a second week. Alliant Techsystems Inc., the world’s largest ammunition maker, obtained a $900 million financing commitment to support its acquisition of Bushnell Group Holdings Inc. America Movil SAB, Latin America’s biggest phone company, sold $750 million of floating-rate bonds.
The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 0.8 basis point to 83.6 basis points, according to prices compiled by Bloomberg.
The Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, was little changed at 105.4 at 10:28 a.m. in London. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan declined 3.8 to 148.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, declined for the second day, decreasing 0.25 basis point to 15.13 basis points. The gauge typically narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities.
Bonds of Philadelphia-based Comcast Corp. were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 3.5 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The seasonally adjusted amount of U.S. commercial paper dropped $5.1 billion to $1.015 trillion outstanding in the week ended Sept. 4, the Fed said yesterday on its website. That’s the lowest level since the period ended Aug. 14.
Commercial paper sold by non-U.S. financial institutions declined $700 million to $260 billion, the second straight decrease, while the amount issued by U.S.-based banks dropped for a third week, falling $5.4 billion to $264.5 billion, according to the Fed.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index was little changed at 97.65 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has returned 3.07 percent this year.
Leveraged loans and high-yield, high-risk, or junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
Alliant Techsystems’s senior secured loans are being provided by Bank of America Corp., the Arlington, Virginia-based company, known as ATK, said yesterday during a teleconference to discuss the acquisition of Bushnell from MidOcean Partners LP. The company may refinance existing borrowings, including extending maturities into the five- and seven-year range, Neal Cohen, chief financial officer, said on the call.
In emerging markets, relative yields narrowed 5.7 basis points to 368 basis points, or 3.68 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure has averaged 307 basis points this year.
America Movil, controlled by the billionaire Carlos Slim, issued dollar-denominated securities due in 2016 to yield 1 percentage point more than the three-month London interbank offered rate, Bloomberg data show.
Banco Bilbao Vizcaya Argentaria SA, Banca IMI SpA and Citigroup Inc. arranged the sale. The company is raising money to pay back debt denominated in Mexican pesos and for other corporate purposes.
Speculative-grade offerings this year are 21.9 percent ahead of the $204.6 billion issued in the similar period in 2012, Bloomberg data show. Sales have accelerated since the end of April, when offerings outpaced last year by 18 percent, or $21.8 billion.
Sprint on Sept. 4 issued $4.25 billion of 7.875 percent, 10-year notes to yield 498 basis points more than similar- maturity Treasuries and $2.25 billion of 7.25 percent, eight- year debt at a spread of 466 basis points, Bloomberg data show. The sale was the largest high-yield offering since June 2008, when Intelsat SA sold $7.1 billion of bonds through three units.
The size of Sprint’s sale was earlier set at a minimum of $4 billion, according to the person with knowledge of the transaction, who asked not to be identified citing lack of authorization to speak publicly.
“It shows the power of an attractively priced name in the high-yield market,” Margie Patel, a money manager at Wells Fargo & Co. in Boston, said in a telephone interview. “It’s sort of a vote of confidence on the part of the high-yield market on the credit.”
While average junk-bond yields in the Bank of America Merrill Lynch U.S. High Yield Index have climbed to 6.89 percent from a record low 5.98 on May 9, they’re still below a 2012 average of 7.5 percent.
The extra yield investors demand to own the debt instead of similar-maturity Treasuries has narrowed to 459 basis points from an average of 606 basis points in 2012, the index data show. The spreads are up from this year’s low of 423 basis points in May.
“Rates are still low by historical levels and that’s incentive for issuers to sell the paper,” Martin Fridson, the chief executive officer of New York-based FridsonVision LLC, a research firm that specializes in high-yield debt, said in a telephone interview. “Issuers are looking to get sales done now.”
--With assistance from Mary Childs, Charles Mead, Matt Robinson, John Parry, Krista Giovacco and Veronica Navarro Espinosa in New York. Editors: Shannon D. Harrington, Faris Khan