The premium investors demand for risky high-yield debt has increased more than ever since the Brexit vote in 2016, as the coronavirus epidemic threatened the corporate credit markets this week.
US junk bonds’ additional yield on T-bills, known as the spread, jumped 52 basis points from 366 bp Friday to 418 bp Tuesday, the largest two-day increase since the United Kingdom. Uni voted to leave the EU almost four years ago, according to an index closely monitored by Ice Data Services.
An unwanted bond sale took place alongside a sharp drop in global stock markets, responding to the spread of the coronavirus beyond its epicenter in Wuhan, China.
“The market has been slapped hard,” said Ken Monaghan, co-director of high performance at Amundi Pioneer in Durham, North Carolina.
Bond portfolio managers said companies stopped operating the corporate bond markets – critical sources of funding – this week amid uncertainty about the magnitude of the economic impact. There were no junk bonds or high-quality debt issued.
“They don’t want to come into the market under these kinds of conditions,” said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “They only come on the market when the bargaining power is decidedly in their favor.”
Jeffrey Gundlach, managing director of DoubleLine Capital, told the Financial Times that the $ 1.2 billion high-yield bond market, where prices have fallen below their 200-day moving average, a key technical level, is “the canary in the coal mine”, signaling more the turmoil of the coming market.
Gundlach noted that the Dow Jones industrial average for blue chip stocks also fell below its 200-day average on Tuesday, “prefigured” by the downdraft of junk bonds.
The sale of unwanted bonds is closely watched by investors and traders, as companies with the lowest bond ratings are generally the most vulnerable to the effects of an economic downturn.
Tuesday’s liquidation was widespread, although the debt of energy companies continued to drive down as the price of oil fell again. Cash bonds issued by household goods retailer Bed Bath & Beyond, steel producer US Steel and Kool-Aid maker Kraft Heinz all fell on Tuesday, according to bond trading platform MarketAxess.
Debt from top-rated companies was also hit, as bonds from automaker Ford, drug maker Mylan and cable TV operator ViacomCBS all fell in value.
Fears of an economic slowdown and increased sales in the equity and corporate credit markets prompted traders to turn to the Federal Reserve for a more flexible monetary policy. Traders have increased the chances of a quarter-point cut in the key rate of the US central bank at its June meeting, according to data compiled by the CME group.
The Fed would be forced to cut rates sooner rather than later in response to the slowdown in economic growth resulting from the spread of the coronavirus, said Gundlach.
“The Fed is in a world of suffering, again. Just a few weeks ago, they welcomed the fact that their policy was “in the right place”. Now, they may have to make a huge pivot, again. “
Additional reporting by Joe Rennison
The premium investors demand for risky high-yield debt has increased more than ever since the Brexit vote in 2016, as the coronavirus epidemic threatened the corporate credit markets this week.
US junk bonds’ additional yield on T-bills, known as the spread, jumped 52 basis points from 366 bp Friday to 418 bp Tuesday, the largest two-day increase since the United Kingdom. Uni voted to leave the EU almost four years ago, according to an index closely monitored by Ice Data Services.
An unwanted bond sale took place alongside a sharp drop in global stock markets, responding to the spread of the coronavirus beyond its epicenter in Wuhan, China.
“The market has been slapped hard,” said Ken Monaghan, co-director of high performance at Amundi Pioneer in Durham, North Carolina.
Bond portfolio managers said companies stopped operating the corporate bond markets – critical sources of funding – this week amid uncertainty about the magnitude of the economic impact. There were no junk bonds or high-quality debt issued.
“They don’t want to come into the market under these kinds of conditions,” said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “They only come on the market when the bargaining power is decidedly in their favor.”
Jeffrey Gundlach, managing director of DoubleLine Capital, told the Financial Times that the $ 1.2 billion high-yield bond market, where prices have fallen below their 200-day moving average, a key technical level, is “the canary in the coal mine”, signaling more the turmoil of the coming market.
Gundlach noted that the Dow Jones industrial average for blue chip stocks also fell below its 200-day average on Tuesday, “prefigured” by the downdraft of junk bonds.
The sale of unwanted bonds is closely watched by investors and traders, as companies with the lowest bond ratings are generally the most vulnerable to the effects of an economic downturn.
Tuesday’s liquidation was widespread, although the debt of energy companies continued to drive down as the price of oil fell again. Cash bonds issued by household goods retailer Bed Bath & Beyond, steel producer US Steel and Kool-Aid maker Kraft Heinz all fell on Tuesday, according to bond trading platform MarketAxess.
Debt from top-rated companies was also hit, as bonds from automaker Ford, drug maker Mylan and cable TV operator ViacomCBS all fell in value.
Fears of an economic slowdown and increased sales in the equity and corporate credit markets prompted traders to turn to the Federal Reserve for a more flexible monetary policy. Traders have increased the chances of a quarter-point cut in the key rate of the US central bank at its June meeting, according to data compiled by the CME group.
The Fed would be forced to cut rates sooner rather than later in response to the slowdown in economic growth resulting from the spread of the coronavirus, said Gundlach.
“The Fed is in a world of suffering, again. Just a few weeks ago, they welcomed the fact that their policy was “in the right place”. Now, they may have to make a huge pivot, again. “
Additional reporting by Joe Rennison
