Dec. 31 (Bloomberg) -- Borrowing costs for Citigroup Inc., AT&T Inc. and hundreds of U.S. investment-grade corporate bond issuers may fall next year as they refinance about $557 billion of bonds, according to data compiled by Bank of America Corp.
Yields on $2.2 trillion of debt in Merrill Lynch & Co.'s benchmark U.S. Corporate Master index dropped to 5.86 percent from this year's high of 6.19 percent on June 12. While losses from subprime mortgages roiled credit markets, the rally in Treasuries more than made up for the widest risk premiums on corporate debt in five years.
``Even if spreads remain relatively wide, we'll see a further reduction in investment-grade bond yields,'' said John Lonski, chief economist at Moody's Investors Service in New York. ``I wouldn't be surprised if we have another drop in benchmark bond yields'' as the Federal Reserve lowers its interest rate target for overnight loans between banks to 3.5 percent from 4.25 percent by the second quarter, he said.
Bond sales may increase 10 percent next year, Lonski said. Investment-grade issues rose 7 percent to a record $1.02 trillion this year, even as contagion from subprime mortgages shut down the market for high-yield bonds, according to data compiled by Bloomberg.
The extra yield investors demand to own bonds rated BBB-and above by Standard & Poor's and at least Baa3 by Moody's doubled this year to 203 basis points, or 2.03 percentage points, more than U.S. Treasuries, Merrill Lynch index data show. The gap, now near the highest since 2002, started the year at 92 basis points and narrowed to 86 basis points on Feb. 22.
Maturities Rise
Investment-grade bonds returned 4.19 percent this year, compared with 8.67 percent for Treasuries, according to the Merrill data. The gains on corporate bonds were the lowest since 2005, while government debt returned the most in five years.
The amount of debt due in 2008 compares with $532 billion this year and $607 billion in 2006, according to Charlotte, North Carolina-based Bank of America. The bank was this year's third- largest underwriter of investment-grade U.S. company bonds, Bloomberg data show.
Citigroup has about $36 billion of bonds maturing next year, Bloomberg data show. Merrill has $42 billion, JPMorgan Chase & Co. has $43 billion and Morgan Stanley has $32 billion. All the companies are based in New York.
AT&T, IBM
Among industrial issuers, San Antonio-based AT&T, the biggest high-speed Internet provider in the U.S., has almost $5 billion of bonds maturing. Armonk, New York-based International Business Machines Corp., the world's biggest computer-services company, has $3.5 billion of notes due.
``It's attractive to be issuing,'' said Gregory Habeeb, who manages $8.3 billion of bonds at Calvert Asset Management in Bethesda, Maryland. ``Treasuries are at 3 percent, 4 percent. It's dream time continually. You don't worry if the spread is 200 basis points.''
Yields on 10-year Treasuries fell to 4.06 percent today from 5.3 percent on June 12, according to Cantor Fitzgerald LP. Two- year notes dropped to 3.09 percent from 5.1 percent in June.
Financial institutions will sell $450 billion of bonds next year, with $325 billion used to fund redemptions, Deutsche Bank AG credit strategist John Tierney in New York estimates. Non- financial companies will issue $280 billion, using about 33 percent for maturing debt, he said.
Junk Bonds
``I would be surprised if investment-grade issuance is not higher in 2008 than it was in 2007,'' said Jonathan Fine, head of U.S. debt syndicate for financial institutions at Goldman Sachs Group Inc. in New York.
Telecommunications, technology, chemicals, energy and utilities companies may ``bring substantial amounts'' of debt to market in 2008, Lehman Brothers Holdings Inc. credit analysts led by Ashish Shah in New York said in a Dec. 17 report. Lehman forecasts U.S. investment-grade sales will total $900 billion.
Borrowing costs for high-yield, high-risk, or junk rated, companies may rise as the slowing economy makes it harder to meet debt payments. Moody's predicts the high-yield default rate will increase to 4.7 percent in 2008, from 1 percent this year. Junk bonds are rated below Baa3 by Moody's and BBB- by S&P.
Yields on speculative-grade debt rose to an average 9.55 percent this year from 7.92 percent at the end of 2006 as spreads widened to 5.73 percentage points from 2.89 percentage points, Merrill index data show.
Sales of junk bonds fell to $145 billion this year from $148 billion in 2006, Bloomberg data show, the first decline since 2005. They may drop to $110 billion in 2008, including about $67 billion to finance leveraged buyouts announced before subprime losses shut down the market for higher-yielding securities in July and August, according to Christopher Garman, head of high- yield strategy at Merrill in New York.
``An uninspiring economy will likely bring the high-yield bond calendar down,'' Garman said in a Dec. 18 report. ``The calendar will continue to struggle with the LBO overhang, likely stretching as far as the entire first half'' of 2008, he said.
To contact the reporter on this story: Caroline Salas in New York atcsalas1@bloomberg.net
