The Corporate Debt Death Spiral Shows No Signs of Stopping
Corporate bond exchange-traded funds were on track for another day of losses in early Thursday trading. The funds have dropped sharply this month as investors worry about the potential economic impact of the spread of coronavirus within the U.S. and a price war between major oil producers.
The corporate bond market’s performance matters for stocks because a decline in bond prices pushes up yields and, in turn, companies’ cost of borrowing. That means it could be pricey for companies to borrow to smooth over demand declines or supply-chain disruptions caused by the coronavirus. And if companies end up cutting costs elsewhere—by laying off workers, for example—that could drag down economic growth more broadly.
Notably, the investment-grade bond market was on early track for its second-worst single-day performance since the financial crisis, according to IHS Markit, as its yield spread over Treasuries widened by one-quarter of a percentage point. One of the biggest investment-grade bond ETFs, iShares iBoxx $ Investment Grade Corporate Bond (ticker: LQD), was down 2.6%. That ETF briefly declined more than funds tracking lower-quality bonds in early trading.
The junk-bond market’s yield spread over Treasuries has blown out to the widest level in at least eight years, according to Andrew Brenner of National Alliance Securities. The two biggest junk-bond ETFs— iShares iBoxx $ High Yield Corporate Bond (HYG) and SPDR Bloomberg Barclays High Yield Bond Fund (JNK)—were down around 3.6% near midday.
“We are seeing significant liquidations,” Brenner wrote early Thursday. “Liquidity continues to be a problem and it is getting worse.”
Wall Street is now looking to U.S. government authorities to ease the pressure on corporate borrowers. While strategists at banks such as JPMorgan Chase look for stimulus for the corporate sectors, strategists at Evercore ISI were speculating about coming action from the Federal Reserve.
“Credit spreads are moving wider again...we have to expect an attempt from the Fed today to calm that. How big that will be is anyone’s guess,” wrote Dennis DeBusschere, a strategist at Evercore. “If they don’t, we just go lower as the negative feedback loop of increasing cost of capital with more severe downside economic risk intensifies. They can’t do much about economic growth, but they can help limit the increase in the cost of private capital.”
Write to Alexandra Scaggs at alexandra.scaggs@barrons.com
No comments:
Post a Comment