Companies have returned in force to the bond market following one of the weakest stretches in years. One corner of the market—U.S. companies raising money in Europe—is on a particularly strong run.
U.S. companies have ramped up issuance of euro-denominated bonds, known as “reverse Yankees,” to a total of €28.46 billion ($32.31 billion) so far this year, according to data firm Dealogic, up from €6.71 billion in the same period of 2018.
Large deals include a €3.5 billion round of bonds issued by Coca-Cola Co., and €1 billion from toothpaste maker Colgate-Palmolive Co.
Driving these deals are lower borrowing costs in Europe, where benchmark rates are still negative and nearly 3 percentage points lower than in the U.S. One factor that held back reverse Yankee bond issuers last year despite that rate differential was elevated hedging costs. More recently, however, those costs have fallen, as seen in derivatives known as cross-currency basis swaps.
“With a shift in the macro outlook and newfound dovishness of central banks, Europe is again seen as a cheap funding market,” said Michal Jezek, a credit strategist at Deutsche Bank.
Another factor helping reverse Yankees: Because of the U.S. tax law overhaul passed in late 2017, U.S. companies are repatriating more profits, increasing the need to issue debt abroad to fund local operations.
In a sign of the strong demand from investors for these bonds, the average “new issue concession” on eurobonds—the extra yield issuers usually have to offer compared with debt already on the market—has ticked down to 0.05 percentage point in February from 0.14 percentage point in January and 0.13 percentage point last year as a 12-month rolling average.
An increased willingness by investors to accept lower returns on corporate bonds is helping this. ICE Bank of America Merrill Lynch bond indexes show the difference between the effective yield on corporate bonds and supersafe 10-year Treasurys has dropped to 1.28 percentage points by the end of last week, from 1.62 percentage points at the beginning of the year. Meanwhile, the spread for European corporate bonds over 10-year German bunds has dropped to 0.86 percentage point from 1.09 percentage points.
The resurgence in reverse Yankee bonds echoes a broader market rebound. Big-name issuers, including Budweiser maker Anheuser-Busch InBev SA, IT giant International Business Machines Corp. and drugmaker Pfizer Inc., have driven total corporate bond issuance globally up to $489.36 billion so far this year, compared with $473.50 billion for the full final quarter of 2018.
That pickup, in what is normally the slowest quarter of the year, marks a return to health for the market from the last quarter of 2018, when issuance hit the lowest level for any quarter in over six years, according to Dealogic.
“When you have just seen a market very weak and suddenly the market is very strong, there is really no reason for you to wait,” said Marc Baignères, head of Western Europe debt capital markets at JPMorgan in London. “What we see is issuers taking advantage of the change in market conditions since the beginning of the year.”
The recovery in the corporate bond market is being helped by meager yields on government bonds, analysts say, which has investors hunting for returns, including in longer-term and riskier debt.
Some analysts question how long the rally can go on.
Christian Reusch, global head of syndicate and capital markets at UniCredit, sees several risks that could spoil the party: the Brexit deadline at the end of the month, coming elections for the European Parliament and trade tensions between the U.S. and Europe, as well as the U.S. and China.
There are also worries about overall indebtedness of companies. Total outstanding debt in the form of corporate bonds has doubled over the past decade to $13 trillion as of the end of last year, according to an Organization for Economic Cooperation and Development report. And triple-B-rated bonds, the lowest rung of investment grade, make up 54% of all investment-grade bonds, compared with 30% in 2008.
Write to Avantika Chilkoti at [email protected]