By John Detrixhe
June 17 (Bloomberg) -- Shorter-maturity U.S. corporate debt, after posting its best monthly return in more than 20 years, is still an “immense” opportunity as frozen credit markets thaw, said Greg Haendel, a money manager at Transamerica Investment Management in Los Angeles.
Investment-grade debt due in one to three years returned 2.95 percent in May and 3.05 percent in April, the highest since 1982, according to Merrill Lynch & Co.’s U.S. Corporates, 1-3 Years Index. The securities have returned 7.95 percent this year after losing 2.68 percent in 2008, the first annual decline in at least two decades, Merrill Lynch data show.
“After Lehman Brothers collapsed, the short end of the credit curve became very, very dislocated,” said Haendel, who oversees the Transamerica short-term fixed-income fund that has gained 8 percent this year and is in the top 6 percent of its class, according to Morningstar Inc. “There still is an immense amount of opportunity in the short end for investors who can do solid credit analysis on those names where the baby got thrown out with the bath water.”
Following the fall of Lehman Brothers Holdings Inc. in September, investment-grade company debt due in 1 to 3 years yielded as much as 0.9 percentage point more than bonds maturing in 10 to 15 years, according to Merrill Lynch index data. In the first eight months of last year, the longer-maturity bonds yielded an average of 1.56 percentage points more than short- term corporate debt.
As markets recover, investors are snapping up short- maturity corporate credit and avoiding longer-term securities on concern the Obama administration’s $787 billion stimulus plan will spark inflation and force the Federal Reserve to raise interest rates, Haendel said.
Projecting Rates
“A lot of people believe, including myself, that interest rates will be headed higher in the intermediate to longer term,” said Haendel, who helps oversee $6.2 billion in fixed- income assets. “In that kind of scenario, you want to be shorter in duration. That’s boosted demand for shorter-end credit.”
Duration is a measure of how much the price of a bond will change when rates rise or fall. Bonds with longer maturities, such as 10 or 30 years, typically are more sensitive to changes in rates or inflation than shorter-term debt. Investment-grade company debt due in 1 to 3 years yielded 5.26 percent yesterday, compared with 7.22 percent for bonds maturing in 10 to 15 years, Merrill Lynch data show.
“The short end of the corporate bond market is becoming very expensive,” said Bill Larkin, a money manager at Salem, Massachusetts-based Cabot Money Management, which oversees $500 million of assets. “It’s taking me a lot longer to find” bargains, he said.
New-Issue Notes
Staples Inc.’s March 24 sale of $500 million of 7.75 percent notes due in 2011 provided opportunity for price appreciation in the short-term new-issue credit market, Haendel said. The notes priced at 100 cents on dollar to yield 6.834 percentage points more than similar-maturity Treasuries, according to data compiled by Bloomberg. Transamerica’s short- term bond fund owns 1,500 of the notes, Bloomberg data show.
The debt of Framingham, Massachusetts-based Staples traded June 15 at 105.75 cents on the dollar to yield 4.4 percent, representing a spread of 3.13 percentage points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Short-term credit is rallying as money flows in from non- traditional bond investors such as endowments, foundations and high-net-worth individuals, said James Keegan, chief investment officer of Seix Investment Advisors in Upper Saddle River, New Jersey. Seix is sub-adviser to the RidgeWorth Investment Grade Bond Funds, which have about $20 billion in assets.
‘Room’ to Rally
“There’s still room in the short end for bonds to rally, but it could back up as volatility picks up,” Keegan said. “Everybody’s sitting on a lot of cash right now, but they’re not willing to go too far out the risk curve.”
Transamerica’s short-term fund also owns 6,250 Xerox Corp. notes due in 2010 and 6,460 Anadarko Finance Co. bonds maturing in 2011, Bloombergdata show. Anadarko Finance is a unit of Houston-based Anadarko Petroleum Corp.
The 7.125 percent Xerox debt has climbed about 1.8 cents from the beginning of the year to 103.52 cents on the dollar on June 10 to yield 3.52 percent, or a spread of 299 basis points, Trace data show. Anadarko’s 6.75 percent bonds have risen about 3.8 cents this year to 104.63 cents on the dollar to yield 4.16 percent, or a 285 basis-point spread. Xerox is based in Norwalk, Connecticut.
Percentage of Issuance
U.S. corporate debt issuers have sold at least $68.2 billion of investment-grade notes maturing from one to three years this quarter, 28 percent of total investment-grade credit sales, Bloomberg data show. Borrowers sold $39.5 billion of the debt during the second quarter last year, which was 14 percent of investment-grade offerings.
Borrower access to the capital markets in a wider range of maturities is a sign of health returning to corporate credit, allowing issuers to disperse risk across a broader range of investors, said Jonathan Fine, managing director on the investment-grade syndicate desk at Goldman Sachs Group Inc. in New York.
“The sub-five-year part of the curve has accounted for a reasonable chunk of issuance in the second quarter,” Fine said in a telephone interview. “One of the most overlooked parts of the rehabilitation of the capital markets has been the increased breadth of maturity that issuers now can access.”
