UPDATE 2-US 1st-half corp bond sales fall-Thomson Reuters

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By Dena Aubin

NEW YORK, June 30 (Reuters) - Bond sales by investment-grade U.S. companies fell in the first half of this year as an uncertain economic outlook and turbulent financial markets limited corporate borrowing.

Investment-grade corporate bond sales fell to $319 billion in the first six months of the year from $395 billion in the same period a year earlier, according to Thomson Reuters data.

Junk bond sales reached a record high $106 billion in the first half compared with $59 billion a year earlier, with a strong first quarter offsetting a plunge in sales since May as the euro zone debt crisis made investors risk averse.

JPMorgan Chase (JPM.N) was lead bookrunner for high-grade bond sales, followed by Bank of America Merrill Lynch (BAC.N). JPMorgan Chase also led the most high-yield bond sales, followed by Bank of America Merrill Lynch.

For the second quarter, high-grade bond sales fell to $103 billion from $188 billion a year earlier. Junk bond sales fell to $43 billion from $48 billion a year earlier. Bank of America was lead bookrunner for high-grade sales in the second quarter, while JPMorgan Chase led high-yield bond sales.

"Financial markets basically peaked in late April," said John Lonski, chief economist for Moody's Investors Service. "They have been under stress throughout May and June, and in response, corporate bond issuance tumbled."

RECORD LOW COUPONS

Stocks and other risky assets sold off in May and June amid fears that the debt crisis in Europe would derail the global economic recovery. A massive overhaul of U.S. financial regulations, which threatened to curb profits at major banks, added to investor jitters.

"It's a very uncertain environment for both borrowers and lenders of corporate debt," Lonski said. "I think companies will be borrowing cautiously for the most part, and what they borrow is going to refinance existing debt or prefund future borrowing needs."

Companies had less need to borrow after spending 2008 and 2009 refinancing bank debt and commercial paper and shoring up their balance sheets with record levels of cash, said Therese Esperdy, head of debt capital markets at JPMorgan Chase & Co.

With falling Treasury yields, however, today's low borrowing costs may prompt some companies to tap the bond market to prefund bonds maturing in 2011, she said.

"Some of the lowest coupons ever were achieved in the corporate market in the second quarter," Esperdy said. "That's enticing some corporate treasurers to look at the market, and that will continue."

U.S. Treasury yields, the benchmark off which corporate bonds are priced, tumbled as concerns about Europe's debt crisis sent investors into safe-haven debt. That pushed average corporate bond yields down to 4.3 percent from 4.9 percent at the start of the year, according to Bank of America Merrill Lynch indexes.

'GOLD RUSH FOR RISK'

Esperdy does not expect a significant pickup in supply in the second half, except in the financial sector. With financial regulatory reform expected to soon be out of the way, bonds in the banking sector could perform better, "and that certainly will lend a better issuance backdrop," she said.

Market volatility also caused a big drop in mergers and acquisitions, reducing companies' needs for borrowed funds, Lonski said. Global merger activity is off to its worst start in six years and bankers fear the second half may be just as subdued. For details click on [ID:nLDE65N010].

The junk bond market owed its record first-half total to a strong first quarter, when about $63 billion in bonds were priced. Sales had surged as a healing of the global financial crisis improved risk appetite, sending investors into lower-quality bonds on a hunt for yield.

"It was just a boom time, a gold rush for risk, and now we're starting to see the cracks form in that story," said John Atkins, fixed-income analyst at IDEAglobal in New York. The renewed caution stems partly from concerns about Europe's sovereign debt and global growth, but also from investors' sense that the easy money has been made, he said.

When the high-yield market was wide open, weaker companies were able to buy themselves breathing room by refinancing debt coming due, he said. However, issuers still have a wall of debt maturing between 2012 and 2014, and "the question going forward is going to be how many companies are going to survive the next three or four years," he said. (Reporting by Dena Aubin; Editing by Chizu Nomiyama)