Corporate bonds boom key to US rebound

ONE traditional sign of a recovery is when corporate treasurers lock in low interest rates. That means the sudden wave of corporate bond sales emanating from the US may be a harbinger of a stronger-than-expected rebound.

Except that in this case, the deluge of debt is clouded by quality concerns.

GE Capital led a pack of firms issuing $30bn (£21bn) in bonds in the past fortnight. It sold $11bn of triple A-rated debt and demand was so high it could have sold $4bn more, analysts said.

But shortly after the sale, Bill Gross, a leading bond market guru questioned the quality of General Electric's debt.

Big companies such as Merrill Lynch and GE use an improved environment in the corporate bond market to refinance balance sheets before interest rates begin to rise with the business cycle.

German drugs firm Bayer and US consumer companies Kimberly-Clarke and Campbell Soup are among those planning debt issues soon.

The bond market's generally improved tone is not limited to star-quality firms. Sales by riskier companies, including telco Sprint, also received a better-than-expected reception. However, in the days following GE's voluminous sale - the second largest in global history - controversy re-emerged. Gross faulted GE for relying too much on commercial paper to make acquisitions to achieve the double-digit growth investors expect.

Still, the sale itself went well enough to be noticed. 'When you see an $11bn deal go so well, it is going to rock the world of other chief financial officers who are going to think if the smart guys at GE are doing it, they had better follow suit,' says bonds watcher Roberta Tucker of Fiserve.

Corporations floating new paper are expected to use the proceeds to retire shorter-term or more expensive debt but at least some may go on expansion or investment.

'Historically, it is profits that drive investment more than cheap money,' says economist Jonathan Basile of Credit Suisse First Boston. 'But the profit profile is going to improve and the money used for balance-sheet repair now will encourage new ventures and investment in the long run.'

Basile believes that if just a small portion of sale proceeds is used for expansion, the US could see a sharper-than-expected bounce in industrial output in coming months.