Rate Cut Hopes Spur Bond Market Boom

Hopes for another Federal Reserve rate cut have sparked a boom in the corporate bond market.

Seeking to capitalize on lower rates and believing the Fed will not let the economy slide into recession, corporations have sold a record $83.05 billion of bonds in U.S. markets, Thomson Financial Securities Data said Friday.

The unprecedented issuance has smashed by 45% the previous record of $57.3 billion set in March.

“Lower rates have caused overall issuance, the whole ball of wax, to rise,” said Richard Peterson, a market strategist for Thomson. “There’s a need for capital, and who’s going to get it for you? Your friendly investment banker.”

Bond investors, who for most of 2000 had favored safer U.S. Treasuries, have had more of an appetite for risk since the Fed cut interest rates by a half-point Jan. 3.

Investment-grade corporate bonds have returned 1.47% this month, according to a Merrill Lynch bond index, while Treasuries have barely eked out a quarter-of-a-percent gain. Junk bonds have soared 5.6%.

The wave of supply, which on Friday included $2.23 billion of bonds from Motorola (ticker symbol: MOT), the world’s No. 2 mobile phone maker, overshadowed a report showing a sharp 2.2% gain in new orders for big-ticket durable goods in December.

The rise did little to change the view that the economy is slowing, as the bulk was explained by a jump in aircraft orders. Excluding transportation, December orders dropped 1.4%.