Last updated: May 8, 2012 11:21 pm

IBM gets record low rate for US debt

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IBM, the computer services group with a reputation for taking advantage of cheap borrowing costs, set a new low at a US debt sale when it sold $600m in seven-year debt with a coupon of 1.875 per cent.

Dealogic, the research group, said the sale was at the lowest interest rate for bonds of that maturity issued in dollars. IBM also issued $900m in three-year notes with a coupon of 0.75 per cent.

Tuesday’s offering was the second for IBM this year after another two-part sale in February, when it issued $2.5bn of three and five-year debt with a 0.55 per cent and 1.25 per cent coupon, respectively.

IBM was joined by other investment-grade companies including Berkshire Hathaway, Motorola and Georgia Power, which also took advantage of lower borrowing costs and sold a combined $8.45bn.

The borrowers benefited from a drop in costs as the average yields on US investment grade corporate bonds touched a new low on Friday, according to a Barclays index.

The yield on the index, which dates back to 1973, fell to 3.25 per cent, below the previous low of 3.27 per cent reached on March 2. On Monday yields went up slightly to 3.28 per cent.

“Companies such as IBM, with no questions on their credit, will have no problem in selling debt even in a somewhat risk averse market,” said Adrian Miller, a global market strategist at GMP. “There will be people lining up to buy such bonds.”

Low corporate borrowing costs in the US and the relative safety of the dollar have also attracted foreign issuers to the US capital markets. UK-based Diageo Capital, a subsidiary of the distiller, sold $2.5bn in five, 10 and 30-year debt.

The increase in borrowing on Tuesday may bode well for the future pace of corporate bond sales after an issuance slump in April and renewed concerns about Europe.

Last month, non-financial companies sold just over $100bn of bonds globally, about half of March’s issuance and the slowest month this year, according to Dealogic. As of Monday, total issuance in May has reached $22.7bn.

April is a historically weaker month for corporate issuance as it coincides with many US corporations’ blackout periods ahead of the release of quarterly results.

“It’s not just a question of record low yields, but with most of the earnings season behind us, we may see a decent rebound in corporate debt sales,” Mr Miller said.

The latest drop in yields on benchmark US Treasury bonds has driven borrowing costs to lows throughout the US markets.

Long-term yields on US municipal bonds fell to new lows on Tuesday with triple A rated 30-year bonds hitting 3.09 per cent, the lowest level for a Thomson Reuters MMD index that dates back to 1981. Last week, the 30-year fixed rate mortgage fell to 3.84 per cent, a fresh low for a Freddie Mac index going back to 1971.

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