UPDATE:Banks Are Driving Record Start In High-Grade Bond Sales

Financial firms, particularly foreign banks, are dominating sales of new highly rated corporate bonds as they tap investor demand and attractive financing costs to refinance government-guaranteed debt, said several market observers.

So far this year, which is off to a record start, financial firms have sold 70% of U.S.-marketed investment-grade bonds, data provider Dealogic said. They accounted for only 45% over the same period last year.

The reason for the rush is clear: About $260 billion of government-supported debt from banks in Europe, Asia, and Australia will mature in 2010, estimated Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. "Most are eager to take advantage of good market conditions early in the new year" to refinance, he said.

This week, UBS AG (UBS), Deutsche Bank AG (DB, DBK.XE), Bank of Tokyo-Mitsubishi and Banco Santander SA (STD, SAN.MC) have offered bond deals. Since the start of the year, companies have sold almost $50 billion worth of investment-grade bonds and over $4 billion in high-yield debt--each the biggest amount on record for that period, according to Dealogic.

Meanwhile, industrial companies aren't expected to sell as much debt as last year, when they propelled the total investment-grade new issuance to more than $1 trillion for the first time ever.

Financial firms historically had dominated sales of new corporate bonds until the credit crisis sparked investor wariness. With markets improving and investors eager for high-quality bonds yielding more than Treasurys, financials are again coming to the fore.

"The tendency of financials is to issue a larger percentage of their annual funding needs during the first four to five months of the year, assuming market conditions are favorable," said Victor Forte, head of corporate bond syndicate at RBS Securities. "2009 was an anomaly."

Still, some say the pace of new financial bonds will slow as constrained lending reduces the need for the funds.

"The year started off with a bang," said Mirko Mikelic, portfolio manager at Fifth Third Asset Management. "It'll tail off in the middle of the year."

J.P. Morgan analysts wrote in a recent note that they expected sales to drop off this month, and suggest financial issuers are simply taking advantage of the recent drop in risk premiums.

"Financials spreads have rallied strongly," they wrote. "This is contributing to the preponderance of financial issuance so far this year."

The rally in financial spreads comes as investors search for the best yields in the investment-grade market; financial bonds still offer about 86 basis points more in yield in comparison to industrial debt, according to a recent Barclays Capital report.

Meanwhile, new deals are swamped with orders, and so they can offer lower returns to buyers. New bonds' concessions, or the additional risk premium to existing bonds, are low, at just 11 basis points this month, estimated Bank of America Merrill Lynch analysts in a recent note.

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