The flurry of bond deals has caught many Wall Street analysts off guard. Market experts broadly expected benchmark U.S. Treasury rates to tick up from 3% at the end of 2013 as the economy grew and the Federal Reserve prepared to end its monthly stimulus, developments that were expected to hit the prices of bonds and trim demand for new debt issues.
Instead, rates have fallen, with the 10-year U.S. Treasury yield recently hitting a 14-month low at 2.3%. Analysts said the decline reflects the uneven domestic growth outlook, geopolitical unrest in Ukraine, Israel and Iraq and fears that Europe is facing a new economic slowdown.
Investors have been lapping up the new debt offerings. Bankers on some deals say they received many more investor orders than bonds available, as portfolio managers seek out securities that offer more yield than Treasurys and bet that the improving economy will ultimately be good for American companies.
According to Dealogic, about $109 billion in bonds has been sold globally this year that identified mergers as a use of proceeds, up from $84 billion at this time last year.
Share buybacks have been another popular use of bond proceeds. S&P 500 companies bought back about $158.4 billion in the first quarter, the third-largest quarterly amount since 2005, according to FactSet.
Monsanto Co. this summer sold $4.5 billion of bonds to help pay for a $6 billion share buyback plan. Bond analysts often take a negative view on such so-called leveraged buybacks, because they potentially reward shareholders with higher stock prices at the expense of bondholders, who face higher debt-service costs on the same revenue base and could lead to a downgrade.
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