By Bryan Keogh and Gabrielle Coppola
June 11 (Bloomberg) -- Investors are demanding the highest yields in almost six years to own U.S. investment-grade corporate bonds, slowing sales of the debt on speculation the Federal Reserve may lift interest rates this year.
Average yields on the securities rose 14 basis points yesterday to 6.32 percent, the highest since July 2002, according to Merrill Lynch & Co.'s U.S. Corporate Master index. A basis point is 0.01 percentage point. The low this year was 5.37 percent on Jan. 23.
Borrowing costs for investment-grade bonds are rising as benchmark Treasury yields climb and investors sell the debt in anticipation the Fed will raise its rate for overnight loans between banks for the first time in two years to rein in inflation. The odds of an increase of at least 25 basis points in September to 2.25 percent are 80 percent, compared with 21.5 percent a week ago, according to futures traded on the Chicago Board of Trade.
``Yields will continue to rise as the markets adjust,'' said Bill Larkin, a money manager who oversees $475 million of fixed- income assets for Cabot Money Management in Salem, Massachusetts. ``The Treasury market sets what direction things are going in, and directions are definitely going higher again.''
Yields on the benchmark 10-year Treasury note rose to 4.10 percent yesterday, the highest this year. Yields on two-year Treasuries posted their biggest back-to-back increase in at least 20 years, surging 55 basis points to 2.93 percent.
Companies are hesitating to offer new bonds as yields rise, with the pace of issuance slipping to about the slowest since March. Borrowers sold $14.4 billion of high-grade bonds last week, following a record $146.2 billion in all of May, according to data compiled by Bloomberg.
Suncor, American Financial
Suncor Energy Inc., the world's second-largest tar-sands producer, last week sold 10-year notes with a coupon of 6.1 percent, the most the Calgary-based company has ever paid for such debt in the U.S., and $750 million of 31-year bonds at 6.85 percent, the highest in six years, according to Bloomberg data.
American Financial Group Inc., a Cincinnati-based property and casualty insurer, postponed a sale of $250 million of 10-year notes rather than pay the higher yields investors demanded because the company wanted to wait until market conditions were ``more acceptable to us,'' company spokeswoman Anne Watson said.
Yields are rising even as a measure of the risk of investment-grade corporate bonds falls to about the lowest since February, Merrill data show. The extra yield investors demand to own investment-grade bonds rather than Treasuries of similar maturity, a measure of corporate risk, widened 1 basis point yesterday to 249 basis points, the Merrill index shows. Spreads peaked at 305 basis points on March 20.
Taming Inflation
Investors sell bonds when interest rates rise because newer debt comes to market with higher yields, pushing prices of existing debt down to compensate for their lower coupons.
The last time yields were higher was July 30, 2002, when they reached 6.36 percent.
Fed Chairman Ben S. Bernanke on June 9 pledged to ``strongly resist'' any waning of public confidence in stable prices and said that the risk of a ``substantial downturn'' in U.S. economic growth has diminished.
Traders' expectations of inflation over the next decade have risen as oil and commodity prices surged. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes yesterday widened to 2.52 percentage points, from 2.45 percentage points a week ago and 2.28 percentage points at the end of April.
Confidence Index
The Bloomberg Professional Global Confidence Index fell to 21 from May's 22.7, with respondents becoming more pessimistic in every region. A level below 50 indicates negative sentiment. The measure had rebounded in the previous two months after hitting a low of 13.1 in March. The survey collated responses from 4,533 Bloomberg users on five continents between June 2 and June 6.
``Because of inflationary expectations, the term structure of interest rates are rising,'' said Wilmer Stith, who manages $3 billion of bonds as a portfolio manager at MTB Investment Advisors in Baltimore. And with company spreads still ``relatively wide -- you have very high yield to maturities.''
The average gasoline price in the U.S. rose 2 cents to a record $4.043 a gallon, AAA, the country's largest motoring club, said yesterday on its Web site.
Energy prices ``are a real burden on Americans and a burden on our economy, and they risk prolonging or lengthening this economic slowdown,'' U.S. Treasury Secretary Henry Paulson said in a Bloomberg Television interview yesterday.
To contact the reporters on this story: Bryan Keogh in New York atbkeogh4@bloomberg.net; Gabrielle Coppola in New York atgcoppola@bloomberg.net
