By Jonathan Stempel
NEW YORK, Nov 20 (Reuters) - International Business Machines Corp. and Household Finance Corp. are this week leading a parade of companies selling more than $15 billion of bonds to yield-starved U.S. investors who are confident that the economy is gathering steam.
At least 34 companies, including banking giant J.P. Morgan Chase & Co. and automaker General Motors Corp.'s finance arm, are poised to make this week the biggest for bond issuance in two months.
Investors fed up with U.S. Treasury yields near four-decade lows and money market yields around 1 percent are buying riskier securities such as corporate bonds and stocks.
"Investor appetite for risk, on both bonds and equities, has done an about-face since early October," said Peter Palfrey, who helps invest $3 billion for Loomis, Sayles & Co. in Boston and planned to buy IBM debt. "The preponderance of negativism went into reverse," he added.
Investors are accepting higher prices, and demanding less yield, to assume credit risk. Since Oct. 10, the average yield gap over Treasuries has shrunk on investment-grade bonds by 0.62 percentage points to 2.05 percentage points, a four-month low, and on "junk" bonds by 1.56 percentage points to 9.41 percentage points, a 12-week low, Merrill Lynch & Co. said.
The improvement mirrors gains in stocks over that time. The Wilshire 5000 index , an index which mimics the U.S. stock market, has risen 13 percent since October 9.
"It's more likely than not that interest rates will rise in the coming months," said Tim Policinski, who invests $1.1 billion for Fort Washington Investment Advisors in Cincinnati. "It's an opportune time for companies to fund."
FED, FORD, HOUSEHOLD ARE TURNING POINTS
Investor appetite for risk rose after the Federal Reserve's half-point interest rate cut on Nov. 6 signaled that Chairman Alan Greenspan won't let the economy fall off a cliff.
Chicago Fed President Michael Moskow on Wednesday said the cut will help boost consumer and business spending in 2003.
Then last week two big, beaten-up bond issuers got good news, and their bonds surged.
Moody's Investors Service affirmed its ratings on No. 2 U.S. automaker Ford Motor Co. of Dearborn, Michigan.
And Household Finance parent, consumer finance company Household International Inc of Prospect Heights, Illinois, agreed to a $14.1 billion all-stock takeover by Britain's HSBC Holdings Plc .
"Companies with 'issues' surrounding them are enjoying their first big moves upward in a long time," said Jim Shallcross, who helps invest $6.5 billion for Independence Fixed Income Associates in McLean, Virginia.
Household Finance on Wednesday sold $1.25 billion of debt yielding 2.5 percentage points more than Treasuries. When trading began, the spread shrank to 2.07 percentage points, a sign of intense demand. Normally spreads tighten a couple of hundredths of a percentage point when trading begins.
Meanwhile, IBM , based in Armonk, New York, plans to sell $2 billion of 10- and 30-year debt expected to yield no more than 1.1 percentage points more than Treasuries. In early October, the yield gap on IBM's bonds maturing in 2028 was half a percentage point greater.
"People think they're pretty smart about opportunistically financing when rates are low," said Palfrey.
And in junk, a moribund market from July to late October following WorldCom Inc.'s collapse, R.H. Donnelley Corp. plans to sell $750 million of bonds to help it buy Sprint Corp.'s phone book business. Junk bond investors have pocketed gains of 4.07 percent this month, Merrill Lynch said. Annualized, that's more than 120 percent.
SLOWDOWN?
New issuance activity is expected to drop as the Thanksgiving Day holiday approaches, and is traditionally subdued in December as investors lock in gains for the year.
Indeed, some investors are already cautious. Corporate bonds, they reason, may outperform Treasuries if the economy gains steam, stocks fare well, and interest rates rise. Yet if rates rise, bond prices will fall, so total returns may be limited.
Policinski is buying mortgage bonds and underweighting corporate bonds. "It's always a good time to diversify with bonds, though if you're trying to time the market, given the long run (lower) in interest rates, it's not necessarily now a good time to buy bonds, especially Treasuries."