Corp bond issuance to drop 29 pct in '10 -Barclays

NEW YORK, Nov 6 (Reuters) - U.S. high-grade corporate bond sales will likely drop 29 percent next year to $750 billion amid rising interest rates, recovering profits and ample cash on company balance sheets, Barclays Capital said on Friday.

The steep drop means investors may struggle to find enough supply after one of the strongest years of corporate bond issuance on record, Barclays said in a report co-authored by Matthew Mish and Alex Gennis.

Barclays' estimates include sales in the U.S. market from foreign issuers, plus government-guaranteed debt from U.S. banks and taxable municipal bonds.

Including those sources, year-to-date investment grade supply has already totaled $950 billion, up 41 percent from all of last year, and will likely surpass $1.05 trillion by year end, Barclays said.

Issuance has surged this year as government bailouts and interventions helped heal a global credit crisis, sparking a massive rally in corporate debt.

Companies were still preparing for the worst, however, building up cash and refinancing debt as corporate profits fell.

Falling interest rates, unprecedented tightening of credit spreads and record inflows of cash into investment-grade bond funds also supported the sharp rise in bond sales, Barclays said.

Supply increased more than 100 percent in the energy sector as companies' cash flow deteriorated rapidly. Financial issuance rose 32 percent as firms took advantage of low borrowing costs through government guarantee programs.

Next year, financial issuance will likely fall 43 percent as government-guaranteed bank supply dries up and borrowing needs fall, Barclays said.

"Many of the larger banks are sitting on sizable cash balances, and deposit growth is strong while loan growth has been muted," Barclays said. "For less well-capitalized banks, balance sheets are projected to shrink upward of 30 to 40 percent, resulting in modest funding needs." (Reporting by Dena Aubin; Editing by Leslie Adler)