Big firms feast on Treasury turmoil

(Fortune) -- The flight to quality has a new destination: big companies that are already swimming in cash.

This week's Treasury selloff sent yields on 10-year U.S. government notes to their highest level since June. Big corporate borrowers took advantage by selling debt at yields far below their levels last year, when bond markets were just reopening after the crisis of 2008.

The swing plays to the advantage of flush companies like Wal-Mart (WMT, Fortune 500) and Anheuser-Busch InBev (BUD), whose bonds can offer investors a little more income without much apparent sacrifice in terms of risk.

"There is a clamor for more yield out there," said Matthew Keator, a partner at the Keator Group, a wealth management firm in Lenox, Mass., with $450 million under management. "Corporate bonds look appealing right now because of the global risks out there for government debt."

Wal-Mart, for instance, raised $2 billion by selling two classes of notes, one due in five years and the other in 30. Investors buying the five-year notes will get a yield of 2.875%, which is 45 basis points above the comparable Treasury note.

When the Bentonville, Ark., retailer sold dollar-denominated five-year notes last May, the premium it paid over Treasurys was nearly three times as large.

The improvement in the terms afforded Anheuser, the Belgian-based brewer of Budweiser and Stella Artois, is even more remarkable.

The company this week raised $3.25 billion by selling three classes of debt, including five-year notes that yield 3.67%. In November, Anheuser raised $3 billion in a sale that included five-year notes yielding 5.4%.

"People would rather lend their money to Anheuser-Busch than the U.S. government right now," said John Brady, an interest rate strategist at MF Global. "A lot of big companies have cleaner balance sheets than the government, for one thing."

While worries about the deep U.S. budget deficit and massive Treasury issuance have been building for months, Brady said this week's selloff in the Treasury market may have been sparked by the President Obama's signing of health care legislation.

"There has been a negative tone in the market, and the thought of adding another costly entitlement program has been a topic of discussion," said Brady. "More Treasury issuance is negative from a supply-demand standpoint."

Meanwhile, giant companies aren't exactly short of cash. Wal-Mart and Anheuser together have $11 billion on hand -- and they aren't alone.

The cash on hand at S&P 500 companies has soared above $1 trillion, according to Bloomberg, after a year of job cuts and dividend reductions. But so far companies aren't seeing a lot of opportunities to put funds to work, says Brady.

That could lead to a slowdown in corporate bond issuance later this year, Brady said, while Treasury supply shows no sign of abating. He said the 10-year Treasury yield, recently 3.9%, could easily rise as high as 4.25% in coming months, though he noted that's still on the low side historically.

Of course, there are several wildcards out there, including action in the currency markets, political strains in Europe and trade tension with China.

"It's getting interesting out there," said Brady.