Market Extra: The U.S. corporate bond market is open again after the worst day since 2008
The U.S. corporate bond market is open again Tuesday, only a day after U.S. credit saw its worst selloff since the height of the financial crisis in 2008.
are two of the companies that looked to borrow in the investment-grade bond market during the session, both of which sit in the bulging BBB credit rating category, a perch only notches above speculative-grade, or “junk-bond” territory.
Coffee chain Starbucks borrowed about $1.75 billion by selling a series of bonds that mature in seven, 10 and 30 years, with funds earmarked to repay outstanding debt, as well as potentially to repurchase the company’s common stock.
Textron, a maker of small aircraft, plans to refinance debt that matures later this year with its new $650 million 10-year financing.
Restaurant and food chains like Starbucks face not only slowing demand as customers stay home to avoid catching the coronavirus, but also a pullback in sales of spending on more expensive items like frothy coffee drinks if a recession were to occur, according to the Wall Street Journal. Nevertheless, a couple of companies ventured back into the bond market, even if that meant paying more to borrow than earlier this year.
“The tone is obviously a little bit better than yesterday,” David Brown, Neuberger Berman’s global co-head of investment grade fixed-income, told MarketWatch, adding that current issuers in the market were being opportunistic in borrowing during a stable patch. “But they’re also high-quality credits,” he said.
Even so, Brown stressed that markets want more detail from President Trump about his emergency relief efforts to help U.S. businesses and households offset the fallout from the coronavirus epidemic, following his proposal for a payroll tax cut after Monday’s market close.
“The market is going to need to see the size and scope of a plan before you get any really big move,” Brown said.
Meanwhile, analysts at Bank of America Global Research pointed to “a toxic combination of virus risk and a collapse in oil prices” as the catalysts for Monday’s dramatic selloff, which left major U.S. stock benchmarks down 7% for the day and raised the prospects of surging defaults among domestic shale oil producers after crude oil prices fell 34% in the past four days.
The selloff left spreads in the U.S. investment grade index wider by a huge 39 basis points to 188 basis points range on Monday, moves the Bank of America team led by Hans Mikkelsen, called “second only to October 10, 2008, at the height of the financial crisis,” in a client note.
Spreads are a level of compensation that investors require over a risk-free benchmark, like U.S. Treasurys, to invest in debt. They also are a gauge of market sentiment, with wider spreads indicating jitters about creditworthiness.
Here’s a Bank of America chart that puts the recent selloff for investment grade bonds into context. It also includes their forecast for how high investment-grade spreads could climb in a recession scenario, but without a full-blown financial crisis.
Sudden spike in spreads
Following Monday’s rout, U.S. stocks were showing signs of stabilization in afternoon trade Tuesday, with the Dow Jones Industrial Average
up about 2.8% and the 10-year Treasury yield trading around 0.66%.
Starbuck’s bonds priced in the afternoon at a spread of 140 basis points over Treasurys for the seven-year slug and 225 basis points above the benchmark for its 30-year parcel of debt, according to a person with direct knowledge of the transaction.
Textron priced its bonds at 237.50 basis points over Treasurys.
