It’s a Borrower’s Bond Market as Amazon Gets Record Low Rates

(Bloomberg) -- Bond investors are so confident the Federal Reserve has their backs, that in some cases they're willing to lend for barely anything in return.

Amazon.com Inc. set record low interest rates in its $10 billion offering Monday, with bondholders agreeing to receive a coupon of just 40 basis points for debt due in three years. The internet giant drew strong enough demand to also set new lows on corporate debt due in seven, 10 and 40 years, according to data compiled by Bloomberg.

Sure, Amazon is in a league of its own in more ways than one, but here it's part of a growing trend of companies taking out debt at minimal costs through the pandemic. Despite a rampant pace of issuance with investment-grade companies selling $1 trillion of bonds this year at the fastest pace ever, funding costs continue to drop amid heavy inflows to the asset class.

Underpinning both the supply and demand is the Federal Reserve, which pledged in March to support corporate debt. That's not only given companies the confidence to approach the market -- especially those in hard-hit industries like hotels and cruise lines -- but also introduced the biggest buyer of all in a market starved for liquidity.

When selling new bonds, companies typically offer a premium to their existing debt to entice investors. In the past week, that's largely evaporated as firms like Ralph Lauren Corp. and Comcast Corp. received orders well in excess of the bonds they're looking to issue, giving them the upper hand in negotiating prices.

At the height of the selloff in March, that extra yield jumped out to nearly 29 basis points on average, according to data compiled by Bloomberg. But in recent days, it's turned negative, with companies able to issue new bonds for around 2.4 basis points less than their outstanding debt. Even leading up to the pandemic, borrowers had to pay up to sell new bonds.

All else equal, more supply should translate to higher borrowing costs, but demand has been so robust that companies have been able to turn the tide in their favor. U.S. investment-grade, high-yield, and leveraged loan funds saw a combined inflow of $13.8 billion in the week ended May 27, the largest on record, according to data from Refinitiv Lipper.