By Dow Jones Business News, February 21, 2013, 03:30:00 PM EDT
By Patrick McGee
J.P. Morgan Chase & Co. ( JPM ) sold $2.5 billion of three-year notes Thursday, taking advantage of strong demand for
debt that is likely to perform well should interest rates rise.
Investors have been clamoring for shorter-term paper after interest rates opened the year with a rapid climb: The 10-
year Treasury rate jumped as high as 2.03% this week, compared with 1.74% in late December. When interest rates rise,
bond prices fall; the further out a bond's maturity is, the more vulnerable it is. Corporate bond prices closely track
Treasurys, so when government rates rose, corporate bonds followed suit.
So far this year, corporate bonds have suffered a 0.87% loss in total return, according to Barclays. Bonds with a
maturity of more than 10 years have lost 2.67%, but three- to five-year bonds have actually gained.
That has more investors concerned about the threat, and it's causing greater demand for short-term bonds, analysts and
"The recent volatility in Treasurys reminded investors that the low-rate environment is not forever and that they
should hedge against a potential rise," said Jody Lurie, credit analyst at Janney Capital Markets.
J.P. Morgan is the latest bank to align its borrowing plans with these investor demands. It priced $750 million of
three-year notes at 0.77 percentage point more than the yield on similar maturity Treasurys. It also sold $1.75 billion
of three-year floating-rate notes, an asset class where interest rates typically reset every quarter. If interest rates
rise, floating-rate notes pay a higher interest rate.
Jesse Fogarty, portfolio manager at Cutwater Asset Management, said it was interesting that the bank chose to sell
more than two times the amount of floating-rate notes than fixed-rate debt. He said it was a reflection of changing
needs among buyers, and he was considering the floating-rate debt.
"There has been a lot of interest in floating-rate paper as rates have drifted higher," he said, noting floating-rate
notes have become expensive.
J.P. Morgan sold the floating-rate notes at a yield of 0.62 percentage point over the London interbank offered rate,
or Libor, an industry standard based on the interest rate banks charge to lend to one another. Mr. Fogarty said that
would translate to 0.77 percentage point over Treasurys, meaning the bank sold floating- and fixed-rate notes at
The J.P. Morgan notes are expected to be rated A2 by Moody's Investors Service, A by Standard & Poor's, and A-plus by
On Wednesday, Morgan Stanley ( MS ) sold three- and 10-year bonds, including floating-rate notes. After orders piled up
for the three-year notes, the bank increased the deal size to $4.5 billion from $3 billion, said a banker familiar with
Morgan Stanley, which carries lower ratings than J.P. Morgan, paid 1.25 points over Libor on its three-year floating
Write to Patrick McGee at firstname.lastname@example.org
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