U.S. Yield Spreads Fall Below Rest of the World

For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt.

Bondholders demanded 166 basis points more in yield to hold U.S. investment-grade company debt instead of Treasuries at the end of 2010, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. On Dec. 3, 2008, companies issuing debt in the U.S. paid 653 basis points more than Treasuries while corporations selling around the world paid 503 basis points more than sovereign governments offered investors in their debentures.

The shift highlights confidence in North America’s economic recovery as companies across the Atlantic in Europe contend with the cost of bailing out Greece and Ireland while waiting to see whether the fiscal crisis ensnares more countries. The U.S. economy is forecast to grow faster this year than either the euro region or Japan, according to Bloomberg surveys.

“In the U.S. you have a little more optimism while in Europe you have more concerns about the sovereigns,” said Greg Venizelos, a credit strategist at BNP Paribas SA in London. “The sovereign issues are holding back spreads in Europe.”

The Federal Reserve’s second round of so-called quantitative easing will boost returns for U.S. bond investors, said John Brynjolfsson, chief investment officer of Aliso Viejo, California-based hedge fund Armored Wolf LLC. The program, also known as QE2, calls for the central bank to buy $600 billion in Treasuries through June.

‘Strong Stimulus Package’

“With the strong stimulus package and QE2, I expect 2011 to be a relatively strong economy and corporate bonds tend to do pretty well in that environment,” Brynjolfsson, who oversees $362 million, said Dec. 3 on Bloomberg Television. “Even if corporate yields rise a little bit it’s likely spreads tighten, which corporate bond managers like to see.”

Elsewhere in credit markets, JPMorgan Chase & Co. retained its place for a third year as the top underwriter of U.S. investment-grade corporate bonds. Billionaire investor Warren Buffett’s Berkshire Hathaway Inc. plans to sell $1.5 billion in bonds and the cost of protecting corporate debt from default in the U.S. fell by the most in a month.

JPMorgan, the second-largest U.S. lender by assets, managed 13.8 percent of the new U.S. investment-grade bond issues in 2010, with $101.6 billion of offerings in 496 transactions, excluding self-led sales, according to data compiled by Bloomberg. Bank of America Corp. and Citigroup Inc. retained the second and third places, respectively, while Barclays Capital displaced Morgan Stanley for the fourth spot.

Berkshire Hathaway Bonds

Berkshire Hathaway Finance Corp. may issue 3- and 10-year notes as soon as today, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. The company said in a regulatory filing that it may use the money to retire floating-rate notes maturing this month. The filing didn’t disclose how proceeds would be used or specify the size or timing of the new debt sale.

Berkshire Hathaway Finance, a funding arm of Buffett’s company that was created in 2003, has $1.5 billion of floating- rate notes maturing on Jan. 11, according to data compiled by Bloomberg. The securities were originally issued in January 2008, according to a separate regulatory filing.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.3 basis points to a mid-price of 82.8 basis points as of 10:59 a.m. in New York, according to index administrator Markit Group Ltd.

Manufacturing Improves

The decline came after a report showed manufacturing in the U.S. expanded in December at the fastest pace in seven months. The Institute for Supply Management’s manufacturing index climbed to 57 from 56.6 in November, the Tempe, Arizona-based group said today. A reading greater than 50 points to expansion, and the figure matched the median forecast of economists surveyed by Bloomberg News.

Average corporate bond spreads outside the U.S. are historically lower in part because the average maturity is 7.8 years, 21 percent shorter than in the U.S., based on the Bank of America Merrill Lynch indexes. U.S. corporate bonds make up half of the worldwide index and European securities account for 30 percent.

U.S. spreads on bank bonds narrowed to 215 basis points on Dec. 22, erasing the borrowing advantage of financial companies issuing debt elsewhere in the world for the first time since June 2003, Bank of America Merrill Lynch index data show. Spreads on bank debt globally touched 216 basis points that day.

‘Highly Accommodative’

“One of the factors that has helped boost the credit outlook for financial institutions in the U.S. is highly accommodative Fed policy,” said John Lonski, the chief economist at Moody’s Capital Markets Group in New York. “That’s allowing them to build up earnings for the purpose of compensating for credit losses arising from the exposure to real estate and other toxic assets.”

The Fed has held the target for its overnight lending rate at zero to 0.25 percent for more than two years. The European Central Bank’s benchmark rate has been 1 percent since May 2009.

Spreads on U.S. investment-grade corporate bonds widened to as much as 150 basis points more than global company debt in December 2008, less than three months after Lehman Brothers Holdings Inc. collapsed in the largest bankruptcy in American history. Relative yields on corporate bonds around the world averaged 35 basis points tighter than U.S. spreads since 1996, when the daily index data began.

Jobless Claims, Growth

Claims for U.S. jobless benefits dropped in the week ended Dec. 25 to the lowest level in two years, showing a turn in the nation’s labor market as the economy accelerates into 2011. Applications for unemployment assistance fell by 34,000 to 388,000, breaking the 400,000 level for the first time since July 2008, according to Labor Department figures.

The U.S. economy may grow 2.6 percent in 2011, according to the median forecast of 69 economists in a Bloomberg survey. That compares with 1.5 percent for the countries that share the euro and 1.3 percent for Japan, separate Bloomberg surveys show.

Pacific Investment Management Co., manager of the world’s largest bond fund, increased its forecast for U.S. growth in 2011 after the Obama administration struck a deal with Congress to extend tax cuts and unemployment benefits. Gross domestic product may expand at an annualized rate of 3 percent to 3.5 percent by the end of the year, compared with an earlier estimate of 2 percent to 2.5 percent, according to Pimco.

Fiscal Crisis

At the same time, investors are weighing possible outcomes for Europe as the region contends with a burgeoning fiscal crisis.

Moody’s Investors Service and S&P cut their ratings on Greece, Ireland, Spain and Portugal last year as those countries struggled to reassure investors they will be able to manage their debts. Spreads on euro-denominated investment-grade corporate bonds widened to 191 basis points on Dec. 31, compared with 166 basis points for U.S. debt.

S&P lowered 1.7 times as many corporate bond ratings in western Europe as it raised in 2010, Bloomberg data show. In the U.S., more companies had their credit ratings lifted than cut for the first time since 1997.

“European sovereign concerns will continue to dog fixed- income markets there relative to the U.S.,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $72 billion in assets.

Bonds from Goldman Sachs Group Inc., Wall Street’s most profitable securities firm, and New York-based Citigroup Inc. posted the largest excess returns in December among the 50 biggest issuers in the Bank of America Merrill Lynch Global Broad Market Index. Debt issued by London-based Royal Bank of Scotland Group Plc and Italy’s UniCredit SpA suffered the biggest losses.

Citigroup notes returned 1.73 percent more than benchmarks and Goldman Sachs debt gained 1.74 percent, the index data show. That compares with losses of 0.28 percent for RBS bonds and 0.26 percent for UniCredit securities.

Read more at Andy Sutton’s Extemporania