Bonds and Their Valuation

Corporate-Bond Issuers Race to the Market as U.S. Yields Approach Record Low On April 25, 2011, the Fed announced that short-term interest rates would be kept near zero through late 2014. Because corporate bonds are indexed to Treasury yields and the Treasury yield hit nearly all-time lows, issuing conditions became conducive for Investment-grade borrowers. Europe's debt crisis fueled the demand for relatively safer U.S. securities, and the market became more confident that Europe's crisis would not significantly disrupt recovery of the world's largest economy. This triggered issuers to announce investment-grade supply benefiting from the low borrowing costs. Companies such as IBM, Procter & Gamble, Petroleo Brasileiro SA, and Berkshire Hathaway announced more than $15.5 billion debt offerings as yields approached record lows. The spread between the Treasury bonds and investment-grade bonds was hovering at narrow levels, making it attractive for issuers to tap into low borrowing costs. According to a Business Week story, "Yields have fallen to 3.55 percent, the lowest level since touching 3.53 percent on Aug. 10, and within 10 basis points of a record low 3.45 on Aug. 4, according to the Bank of America Merrill Lynch U.S. Corporate Master Index." Another factor contributing to the rising issues of investment-grade bonds was purchasers' eagerness to invest in high-quality securities. Sales of debt offerings had fallen 19% from the year before, and that made investors eager to spend cash on offerings. Sources: Hong, Nicole, Berkshire, PAG Lead Charge of Corporate Bond Issuers. The Wall Street Journal Online, 10 Aug 2011, ; Catts, Tim, IBM, PAG Plan Bond Sales as U.S. Vields Approach Record Low Business Week, 1 Feb. 2012, The relationship between corporate bond yields and Treasury yields The artide highlights an important relationship between the corporate bond yields and the U.S. Treasury ylelds. When demand for Treasures increases, prices rise and yields . All else being equal, this leads to the of corporate bond yields because they are riskier and their yields are than U.S. Treasury yields. However, this does not necessarily imply that particular changes in the Treasury yield will lead to similar changes in the corporate bond yields. A corporate bond with a narrow yield spread and high credit rating will offer a relatively return when the bond is purchased. However, if the yield spread widens, the price of the bond will thus the value of the fixed- Income asset class in the investor's portfolio