Dallas-based chipmaker Texas Instruments (Nasdaq: TXN) priced US$750m worth of corporate bonds Monday, as an easing of trade-related fears helped boost sentiment for riskier assets.

Texas Instruments was the sole issuer to grace the U.S. investment-grade primary market, amid the upcoming Labor Day holiday, and after a recent groundswell of new supply was offered to yield-hungry bond investors.

The iconic tech giant priced its 2.25% senior unsecured notes due September 4, 2029, at a spread of 75 basis points more than U.S. Treasuries of similar maturities, a yield to maturity of 2.285%.

Bond investors generally snapped-up the offering, with spreads on the issuance having compressed by roughly 20 bps over the course of its pricing evolution.

(Click on image to enlarge)

Texas Instruments said it expects to use the net proceeds from the sale for general corporate purposes, with the deal – rated ‘A1’ by Moody’s (Stable Outlook) and ‘A+’ by Standard & Poor’s (Stable Outlook) – jointly lead-managed by Barclays, BofA Merrill Lynch, and J.P. Morgan.

TI’s latest bond sale adds to its nearly US$4.6bn in net long-term debt as of June 30, 2019, with some market participants fretting about the firm’s recent rise in leverage and dip in earnings.

In early March, for example, the company had also sold US$750m worth of 3.875%, ‘A’-rated, senior unsecured notes due March 2039.

Although the apparently aggressive financial policy may have some market participants concerned, TI’s 20-year bond issuance has since climbed in value amid a surge in the prices of U.S. government debt and heightened demand for yield – especially among those overseas bond investors who have been priced out of their local markets or have a dearth of available paper.

The notes, initially sold at a spread of 82 bps more than U.S. Treasuries, a yield to maturity of 3.94%, were last quoted at a yield of around 2.7%. The bonds were last trading at a premium of US$117.35, according to the IBKR Trader Workstation.

Earnings: A Sigh of Relief

In terms of earnings, while TI beat most market participants’ estimates with its results for the second quarter of 2019, it also posted negative year-on-year revenues, operating profits and net income. TI chair and CEO Rich Templeton said his company’s 9% plunge in revenue to US$3.67bn in Q2 was due to “broad-based weakness,” with analog revenue down 6% and embedded processing plummeting 16%.

Overall, the company earned US$1.36 per share in Q2’19, 3% less over the same year-ago quarter, with expectations for its Q3’19 revenue to range between US$3.65bn to US$3.95bn. It also thinks it will earn between US$1.31-US$1.53 EPS in Q3’19, including an estimated US$10m discrete tax benefit.

(Click on image to enlarge)

Market participants had generally taken solace in the results, having expected worse Q2 figures – and Q3 guidance – as concerns about the welfare of the semiconductor company intensified, amid escalating tensions between the U.S. and China, as well as unresolved conflicts related to Shenzhen-based Huawei.

TI, whose stock has been tracking the PHLX Semiconductor Sector Index (Nasdaq: SOX) closely – and now outpaces it – has widely been considered a proxy for the chipmaking industry.

Moreover, in Q2’19, TI generated free cash flow of nearly US$6.0bn for the trailing 12 months (TTM) – 39% of revenue – which generally reflected health in its business model, while returning US$8.0bn to owners through stock repurchases and dividends over the past year.

Moody’s Investors Service recently noted that through semiconductor cycles, it expects TI’s cash flow will “remain supported by its ability to maintain solid market positions by virtue of the depth and breadth of its technology,” adding that diverse end markets, customers, and products that have “long life cycles and stable pricing throughout most of its product offerings also contribute to a strong credit profile”.

(Click on image to enlarge)

Gasp for Yield

Meanwhile, TI’s latest deal fell against a backdrop of improved sentiment about riskier assets, amid some optimism about a resolution for the U.S.-China trade conflict, and as global demand for yield remained voracious.

Nuveen analysts Bill Martin and John Miller observed that investment-grade corporate bonds continue their “march higher.” They noted that the asset class recorded positive returns for the sixth straight week and now leads all taxable fixed income categories for the third quarter to date.

According to the Bloomberg/Barclays Index, U.S. investment-grade corporate bonds have returned almost 13.6% year-to-date and nearly 12.75% over the past one year – more than U.S. high yield corporates (10.60% and 6.26%, respectively) and U.S. mortgage-backed securities (5.17% and 6.63%, respectively).

Furthermore, for the week ended August 21, Thomson Reuters/Lipper U.S. Fund Flows reported a net inflow of roughly US$2.05bn into investment-grade corporate bond funds, while riskier, high yield funds saw net outflows of US$1.5bn. International and global debt funds also posted net outflows of more than US$500m.

Nuveen added that persistently low and negative interest rates in other parts of the world have “fueled strong foreign demand for U.S. corporate debt.”

Indeed, interest rates on several sovereign government notes have turned negative, including across the yield curves of Germany, Switzerland, The Netherlands, Sweden, as well as most of France and Japan.

While recent inversions of parts of the U.S. yield curve continue to spur jitters and debates about a near-term recession, many in the market do not foresee rates turning negative. U.S. government bonds also offer more yield than their global counterparts, making them more attractive to foreign fixed-income investors.

The yield on the 10-year U.S. Treasury note was last bid at about 1.485% intraday Tuesday— an inversion of roughly 4.4 bps with the 2-year note, which was trading at around 1.529%. Also, the yield on the 3-month bill remained around 51.5 bps higher than the 10-year note.

Supply Side

Given the ongoing solid demand, investment-grade corporate issuers generally continue to take advantage of the still, ultra-low interest rate landscape to sell new bonds.

To date in August, high-grade corporate issuers have sold more than US$77.50bn of new notes, exceeding most syndicate managers’ estimates by over 105.5%, with more supply eyed in the pipeline.

Ron Quigley, head of fixed income syndicate at Mischler Financial, pointed out that some potential deals in the works include toy company Hasbro (Nasdaq: HAS), which could bring as much as US$3bn worth of ‘BBB’-rated bonds to market to help finance its recent purchase of Entertainment One.

Also, a ‘BBB’-rated, private placement from the Export-Import Bank of India may be offered following a series of investor meetings in the U.S., Europe and Asia that began July 30. And for more conservative risk-takers, Quigley also said Municipal Finance Authority of British Columbia is on tap with a ‘AAA’-rated, 5-year note sale, which is being managed by joint leads Bank of Montreal, CIBC, National Bank of Canada and Royal Bank of Canada.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.