Record year for corporate bonds

Sales of pan-European corporate bonds reached a record €1 trillion (£880bn) during 2009 amid surging demand for high-yielding assets as investors sought an alternative to volatile equities and low yields on cash deposits.

The London Stock Exchange’s new corporate bond exchange launched this month and aims to attract individual investors to the corporate bond market.

Sterling-denominated corporate bonds returned a record 15% during 2009, compared with a return of -12% during 2008, according to Bloomberg and Bank of America Merrill Lynch. However, according to data compiled by Bloomberg, sales of corporate bonds have flagged and borrowing costs are rising for the first time in around two months. Global bond sales fell by 52% during the third week of January compared with the previous week.

According to Bloomberg, Virgin Media issued the largest-ever release of sterling-denominated high-yield debt during the month. High-yield debt is graded BBB- by Standard & Poor’s and below Baa3 by Moody’s Investors Service. Demand for higher-risk debt has risen amid an environment of relatively low returns on government bonds and investment-grade bonds. Moody’s Investors Service expects the default rate among speculative-grade companies, currently running at 12.5%, to drop to 3.3% during 2010.

Royal Bank of Scotland issued €2bn of debt due in 2017, while Barclays issued €2bn of seven-year bonds. Rail and bus operator National Express issued £350m of bonds during January, its first-ever bond issuance. Meanwhile, Cambridge University is reported to be contemplating an issue of long-dated bonds in order to take advantage of the rally in credit markets. This move would be highly unusual for a UK university, although some educational establishments in the US and Europe have issued bonds. According to Bloomberg, Lancaster University issued £35m of bonds in 1995.

The pound reached a four-month high against the euro during the month, boosted by the news that US food giant Kraft’s controversial takeover of UK confectioner Cadbury had finally been agreed. The takeover shows that overseas cash is coming into the UK to buy British assets, which have become relatively cheap.

Meanwhile, during December, UK inflation posted its fastest-ever increase compared with the previous month. Inflation is now running at 2.9% compared with 1.9% in November, a rise of one percentage point over the month, and well above the Bank of England’s rolling 2% target. The news fuelled concerns that interest rates might rise sooner than expected.

Record year for corporate bonds