Corporate debt issuance at 3-year high

NEW YORK (CNNMoney.com) -- A flurry of activity erupted in the corporate debt market this week as investors warmed up to the idea that the economic outlook is brightening, but weren't yet ready to dive into the stock market.

Corporations issued $33.7 billion in investment grade debt this week, the highest weekly amount since May 2008, according to an analysis conducted by Thomson Reuters. Thirty-five offerings were made, the most in about three years.

Hewlett-Packard (HPQ, Fortune 500) was the top issuer of the week, selling $3 billion in bonds. Societe Generale SA and Bank of Tokyo-Mitsubishi issued the second largest amount of debt, about $2 billion each, followed by American Express (AXP, Fortune 500) Credit, which sold $1.99 billion in bonds.

The rush to issue debt comes amid record low interest rates and better-than-expected reports on economic activity, leading corporations to jump on the opportunity to capture any increase in demand.

"Issuers that had been waiting for clearer skies plunged into the market this week," said Jim Vogel, head of agency debt research at FTN Financial.

But as skies clear, why are investors turning to bonds instead of stocks? Government-backed Treasurys are typically viewed as the safest investments, with the lowest yields, while corporate bonds are slightly riskier and tend to offer slightly higher rates of return. Stocks are the riskiest of the bunch, but can be the highest yielding.

Worries about a double-dip recession have sent investors into Treasurys over the past few months, pushing yields to record lows. But as economic data has improved over the past couple weeks, some investors are now ready to transition into a slightly riskier arena, without jumping into the volatility of the stock market.

"People may be growing tired of buying really low yields on Treasurys and be looking for ways to pick up those yields, but still feel relatively safe," said David Coard, head of fixed income sales and trading at the Williams Capital Group.

Year-to-date issuance lags: Overall, however, investment grade issuance is down 5% from the same period last year, with year-to-date issuance at its lowest level since 2005. And analysts say this week's supply and demand frenzy may not be the beginning of a long-term trend.

"Right after Labor Day, people tend to consider summer over, so a lot of pent-up supply and demand comes to floor," Coard said. "We'll have even more people back from vacation next week, so we might see [issuance] at these levels for now. But because I think the increase is more of a matter of pent-up supply and demand, I'm not sure it will continue at these record levels."

As this pent-up demand fizzles, corporate bonds may begin to lose their allure.

"There's a traditional push to stay invested in corporates through the fall, but typically corporate buying season ends in November," Coard said. "I'll be surprised if this [level of] activity continues into the second half of December. I think demand will burn itself out."

Treasury yields on the rise: As investors flocked to corporate bonds, and improving readings on jobless claims and the nation's deficit eased economic jitters this week, Treasurys came under pressure, sending yields higher.

On Friday, the yield on the benchmark 10-year note jumped to 2.81%, from 2.76% late Thursday. Prices and yields move in opposite directions.

The yield on the 30-year bond climbed to 3.88%, the 2-year yield rose to 0.58%, while the 5-year yield edged up to 1.6%.

"There has been a big fear that we're going to experience a double-dip," said Coard. "So a certain degree of relief occurred when these reports showed that the economy isn't falling out of bed."