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U.S. Corporate Bonds (April 6-10): Fed Helps Record Deals Get Done


Senior Market Analyst at Interactive Brokers

Investment-grade corporate bond sales are set to continue to rock the primary market after an unprecedented spike flooded the docket this past week.

Deals in the holiday-shortened week ahead could amount to roughly US$40bn, if market conditions remain intact, after nearly US$118bn worth of fresh, high grade debt deals priced in the past week.

Corporate Bond Issuance Lifts in 2020 YTD YoY

The latest blast of new issuance eclipses the prior week’s total of around US$110bn and comes amid the Federal Reserve’s recent actions to help shore-up stability in the financial system, in part by purchasing investment-grade corporate bonds from U.S. companies in both the primary and secondary markets.

The central bank’s historic decision falls in the wake of tremendous economic devastation to the U.S. and globally, as the novel coronavirus continues to wreak havoc.

To date, almost 1.3m of COVID-19 cases have been identified in 183 countries and regions, with around 26.2% of that total having hit the U.S., according to the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University. Nearly 70.6k people have suffered fatalities globally.

However, investors were generally upbeat about riskier assets in the Monday morning trading session, amid reports that the novel coronavirus outbreaks and related deaths may be reaching a crescendo. The optimism had supported risk-taking, spurring U.S. stocks about 4%-5% higher intraday and helped depress prices of U.S. Treasury securities across the curve.

Optimism about COVID-19 Receding Helps Push Treasury Prices Lower

Yields on the 10-year U.S. Treasury note and 30-year bond were last bid at around 0.651% and 1.271%, respectively.  

Neil Azous at Rareview Macro highlighted that recent news about shelter-in-place orders and social distancing measures are slowing the virus was the reason behind the bid-tone in risk assets Monday.

He noted that over the next 72 hours, “if the virus curve breaks in key locations (i.e., Italy, Spain, New York City), given the location of asset prices, from a trading and sentiment standpoint, fighting strength in risk assets is sub-optimal.” Moreover, Azous added if “New York peaks, sentiment will shift that the peak in the U.S. is over in the next 7-10 days.” In other words,
“peak bad virus news may be imminent.”

Against this backdrop, a swarm of high-grade corporate issuers had quickly stormed the gates with new offerings, including US$575m worth of 30-year bonds from Berkshire Hathaway-owned (NYSE: BRK.A) Burlington Northern Santa Fe, as well as two-part debt sales each from Caterpillar (NYSE: CAT) and semiconductor giant Broadcom (NASDAQ: AVGO).

Meanwhile, many syndicate managers remain concerned about whether the recent influx of investment-grade corporate bond issuance will continue, as the ongoing virus-induced devastation could spur potential defaults amid historically brutal economic data. Others also worry that the flood of new deals may reach a technical breaking point despite the Fed’s new measures.

Nervous bondholders, for example, continued their exodus out of investment-grade corporate funds. For the week ending April 1, Refinitiv
U.S. Lipper Fund Flows reported massive net outflows of almost US$8.5bn from high-grade corporate funds after around US$38bn was withdrawn in the prior week.

Still, spreads on high quality credits have been generally on the rise despite the outflows.

Risk assets swing to big gains even amid outflows
Nuveen analysts Bill Martin and John Miller observed that investment-grade corporate bonds had recently “rebounded dramatically,” with sentiment bolstered by news of the Fed’s purchase program.

Cash spreads on high grade corporate bonds were roughly 5.5 basis points tighter Monday, led by the communications (-8.5 bps) and health care (-6.9 bps) sectors.

Market participants will likely be paying close attention to the corporate bond market as issuance scales higher, amid unprecedented and volatile conditions in the credit markets.

In the meantime, use the global bond scanner in the IBKR Trader Workstation to locate corporate bonds that are available to trade in the secondary market, along with U.S. Treasuries, municipal bonds, non-us sovereign debt and more.

e IBKR Trader Workstation to locate corporate bonds
Disclosure: Interactive Brokers

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Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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