Credit mkt shrinks first time in 15 yrs

Written by Bloomberg | Updated: Dec 31 2009, 04:19am hrs
The amount of corporate debt outstanding globally shrank for the first time in at least 15 years in the first half of 2009 as US banks reduced the size of their balance sheets, according to Mizuho Securities Co.

The volume of corporate bonds, commercial paper and assetbacked securities fell to $52.9 trillion at June 30 from $53.2 trillion on the same day in 2008, Tetsuo Ishihara, a senior credit analyst for Mizuho in Tokyo, said in a report yesterday that analysed data from the Bank for International Settlements. Its unprecedented that the global debt market shrinks, Ishihara said in a telephone interview.

When redemptions and buybacks are greater than new issues the outstanding size can shrink, which appears to have happened here.

Financial companies in the Americas had $1.1 trillion in losses and writedowns since the credit crunch started in 2007, about 65% of the global total, according to data compiled by Bloomberg.

The extra yield investors demand to own investment-grade US corporate bonds instead of Treasuries narrowed to 1.91 percentage points from 6.03 percentage points this year, Merrill Lynch & Co. data show, prompting companies to buy back debt to reduce interest payments.

The global credit market shrank 2.2% between January 1 and March 31 from a year earlier and 0.5% in the second quarter, according to Mizuhos report, which cited BIS data back to 1994.

Companies reduced net debt even as US corporate bond sales climbed to $744.7 billion in the first half from $617.8 billion in the same period a year earlier, Bloomberg data show. If the size of the market shrinks further, spreads will be well supported, Ishihara said.

Treasuries set for worst yr since 1978 as US steps up sales

Treasuries headed for the worst year since at least 1978 as the US stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades. US seven-year notes were little changed before todays $32 billion sale of the securities, the last of three auctions this week totaling $118 billion. The Treasury sold a record- tying $42 billion of five-year securities on Tuesday and $44 billion in two-year notes on December 28, the US government securities have fallen 3.6% this year, according to Bank of America Merrill Lynch indexes, the worst annual performance since at least 1978, when Merrill began collecting the data. Supply is a challenge and will continue to be a challenge next year, said David Schnautz, an interest-rate strategist. But despite supply and the prospect of economic recovery, I still expect US treasury yields to be structurally low as banks are likely to increase their holdings of safe and liquid assets. He added.