November Helps Offset Paltry October


With rising interest rates plaguing the bond market, October saw just $67 billion in U.S. debt - the lowest monthly total for fixed-income issuance in more than two years - thanks in large part to declines in corporate activity.

However, a small hike in volume this month is helping junk pros, in particular, forget October's disappointing numbers. In fact, the junk market has already topped last month's total, with close to $10 billion of deals priced as of Wednesday, Nov. 17.

"Activity has ramped up considerably in the last couple weeks," said Gregory Peters, a high-yield strategist at Salomon Smith Barney. "We're seeing a lot of opportunistic activity from sectors like telecom and cable, and drive-by deals from repeat issuers. They don't have to come to the market."

It's important to note, though, that much of that issuance came in just a few days as a number of large deals hit the market and quickly priced in the same day or the very next day.

High yield issuers, in particular, have been bombarded by negative trends all year. In addition to higher rates, junk-rated companies have had to contend with an institutional investor base with much less tolerance for risk. And high-yield mutual funds, which serve as the junk market's engine, have experienced capital outflows since July.

Still, the nine-month overall figures are solid. Bond issuance for the period, while dipping slightly, remained higher than during much of the borrower-friendly first half of 1998, before the onset of the global liquidity crisis.

Fixed-income analysts attribute this resiliency to an unlikely source: Y2K. Spurred on by dire predictions of a complete market shutdown in the fourth quarter of this year, many of the largest companies decided to push forward their funding programs to get their bond issues out of the way early.

"For the first nine months in the investment-grade market, new issuance was at a record pace," said Bill Cunningham, senior corporate bond strategist at Merrill Lynch & Co. "But most people didn't realize that the reason we didn't see a falloff was because the Y2K trade had kicked in."

By the end of September, interest rates were still worrisome and the Y2K trade had played itself out, as issuers who wanted to get in ahead of year-end volatility wrapped up their deals. Meanwhile investors, many of whom had also increased their activity in the first three quarters to meet performance goals ahead of Y2K, were saying, "no mas," by Sept.1, Cunningham said. As a result of these trends, "issuers were left with less need and less desire to come to market," he added.

In the high-yield market, these factors added up to a grand total of $5 billion in new supply last month, a drop-off even from the dismal monthly average of $8.6 billion so far this year. But since high yield investors have seen little in the way of product for months, the deals that are coming to market now are finding good demand. In fact, instead of shuttering its doors against Y2K, the junk market is rallying.

"[The expected Y2K shutdown] has been pushed farther and farther back," Peters said. "At first people were saying that the market would close down after Sept. 1. Then it was Oct. 15. But here we are, and we've already beaten October's numbers."