3rd UPDATE: US High-Grade Bond Sales See Strong Start To 2010

Corporate borrowers, led by financial-services firms, jockeyed Tuesday to tap an accommodating bond market, offering about $24.5 billion in dollar-denominated investment-grade debt even after an influential fund manager said he planned to become a choosier buyer.

Lloyds TSB Bank was pitching the largest deal of the day, $5 billion in five- and 10-year notes. Closely following were General Electric Capital Corp., the finance arm of General Electric Co. (GE), and the German development agency KfW, each marketing $4 billion deals. Other issuers included Barclays Bank, Deutsche Bank, and Motiva Enterprises. Dexia Credit Local was offering $4.5 billion in government-backed notes.

Should every deal sell by the end of Tuesday, as expected, the daily tally will be the second-largest on record, just shy of $27.7 billion sold on Feb. 18, 2009, according to Dealogic.

"Everyone wants to borrow money right now," said Greg Habeeb, head of taxable fixed income at Calvert Asset Management in Bethesda, Md. "They're fighting over each other to get it done."

Some investment managers, however, are leery of the rally, which began last year, when overall investment-grade bond sales exceeded $1 trillion for the first time. The skeptics wonder if new bonds offer enough compensation to cover investors' risk should the economic recovery be more sluggish than expected.

Paul McCulley, who runs the short-term bond desk at Pacific Investment Management Co., or Pimco, the world's largest bond fund, recently said his firm was "becoming a bit more cautious than we have been" with corporate bonds. He said carefully selected high-quality bonds from banks, health-care companies and utilities offer value.

Financial firms are particularly eager to take advantage of low Treasury yields before they move higher, said Charles Sanford, managing director at Babson Capital Management. The interest rate that companies must pay on bonds is tied to Treasury bond yields.

Sanford added that banks also want to establish the ability to issue corporate debt without government guarantees. Many relied on guaranteed notes in 2009, when investors were particularly worried about the health of financial institutions.

Skeptics aside, investors seem eager to accommodate borrowers. One measure of that is a benchmark high-grade credit derivatives index, a barometer of investor sentiment toward credit, which has improved to its best showing in two years.

The Markit CDX North American Investment Grade index, which tracks the cost of default insurance on a basket of North American investment-grade companies, fell to 81 basis points Tuesday afternoon. The index last closed at 81 basis points on Jan. 2, 2008, according to Markit, a data provider.

January is often a busy month for bond sales, as companies address funding needs after the holidays and before their fourth-quarter earnings reports, Bank of America Merrill Lynch analysts said in a note.

They estimated that this month's tally will be between $75 billion and $85 billion, with more financial bonds coming without government guarantees. That would be less than the total in January 2009, when companies issued $123 billion in dollar-denominated debt, according to Dealogic.

That is roughly in line with forecasts for a slower year in corporate bond markets this year. Barclays analysts recently estimated that new high-grade bond sales would drop about 40% from 2009's record of $1.06 trillion.

-By Romy Varghese, Dow Jones Newswires; 215-656-8263; [e-mail]