Signs of a stronger U.S. economy are rippling through the bond markets, sending investors and corporate leaders racing to prepare for higher interest rates.
Investors have pulled money out of assets ranging from lower-rated corporate bonds to ultrasafe U.S. Treasurys in sums unseen since the financial crisis. Investors yanked $17.67 billion from funds that invest in bonds in the two weeks ended June 12, according to data company Lipper, a unit of Thomson Reuters.
Trading has been volatile, and some investors have lost money after a long rally in many debt markets.
Some lower-rated companies such as Yankee Candle Co. scrapped plans to sell bonds, while some others had to pay more to get their money. Others, like highly rated Wal-Mart Stores Inc., locked in funding at low rates. Some of the bonds issued by Apple Inc. in its record-setting $17 billion April deal have seen prices decline more than 8%, according to MarketAxess.
The U.S. economy added 175,000 jobs in May, slightly higher than economists had expected. In the housing market, sales of previously owned homes were up 9.7% in April from a year earlier, according to the National Association of Realtors.
Buyers of U.S. Treasury debt since bonds began selling off at the beginning of May have lost 1.89% as of June 17 closing prices, according to Barclays. Investors in high-yield bonds have lost 1.83%.
The yield on the 10-year Treasury note, which drives the rates on U.S. home mortgage loans and other consumer debt, has risen to 2.18% from its low point on May 2 of 1.62%, according to Tradeweb. Bracing for the turmoil, investors are protecting their portfolios more against interest-rate changes by hedging with derivatives.
Thus far in June, the average daily volume of interest-rate futures and options contracts traded at CME Group Inc. was 7.7 million, up from a daily average of 4.27 million in the whole month of April, according to exchange data.
Investors may be stashing their cash in money-market funds for now. Investors pulled money out of stock funds in the week ending June 12, according to Lipper. Money-market funds catering to individual investors took in $11.04 billion, according to the Investment Company Institute in the same week. That is the largest week of money put into such funds since $13.99 billion in the week ended Jan. 2, according to ICI data.
The sharp movements in the bond market have caused some companies to change their borrowing plans. Supermarket-chain operator Ingles Markets Inc. sold $700 million of high-yield bonds earlier in June at an annual interest rate of 5.75%, above the earlier suggested pricing of 5.5%. "Junk"-rated Warren Resources Inc. and Yankee Candle pulled their deals altogether.
Yankee Candle wanted to borrow money to pay a dividend to its private-equity owners, a type of deal considered risky by investors because it increases a company's debt load to provide returns to its owners.
"We didn't hit it at its absolute bottom," said Ron Freeman, chief financial officer at Ingles Markets. But "we felt like, even with the pricing coming in a little wider, that the market was going to continue to move away from us, and we were very glad we went ahead and got our deal done."
Others are scrambling to get deals done while conditions are favorable. Wal-Mart recently refinanced $17.3 billion worth of bank credit lines, the largest refinancing of a syndicated loan this year, according to data provider Dealogic.
Wal-Mart is among a host of U.S. companies that have refinanced $538 billion in such loans this year, 53% more than $352 billion refinanced in the same period last year. The companies are putting new start dates on one- to five-year loans, allowing them low-cost cushions to ride out bumpy conditions.
Some highly rated companies have waded back into the U.S. market with sales tailored to investors' preference for debt that matures in short time frames. Longer-dated debt is more sensitive to rising interest rates. Bond yields rise when prices fall.
A finance unit of mining giant Rio Tinto Group sold $3 billion of bonds on Friday, with maturities of five and a half years or shorter, and Chevron Corp. sold $6 billion Monday with maturities no longer than 10 years.
Sheila McKinney
