TSLA Tesla Inc

By Sam Goldfarb 

Bonds from major technology companies have held up better than their stocks in recent weeks, a sign that investors are more concerned about the once-soaring valuations of tech giants than the companies' long-term financial health.

The prices of bonds backed by firms such as Google parent Alphabet Inc. have fallen modestly recently as their stocks have tumbled. Yet bonds from other sectors have fallen more, dragged down in large part by rising benchmark interest rates.

Since reaching a nearly 13-year low of 0.71 percentage point on Feb. 2, the extra yield, or spread, that investors demand to hold investment-grade tech bonds over risk-free Treasurys has increased 0.18 percentage point, according to Bloomberg Barclays data. Over the same period, the average spread of all investment-grade U.S. corporate bonds has increased a larger amount: 0.25 percentage point to 1.10 percentage points.

By contrast, the S&P 500 information technology sector, even after rising 1% Tuesday, has fallen roughly 4.7% over the past month -- exceeding the 2.9% decline of the overall S&P 500.

A variety of developments have hurt the shares of tech-focused companies recently, from worries about Facebook Inc.'s use of users' data to President Donald Trump's critical tweets about Amazon.com Inc. Electric-car maker Tesla Inc. has shed value amid increased scrutiny of its driverless-car technology and growing worries about its ability to fund its growth with capital raises.

Some investors and analysts said shares of those companies were due for a course-correction after months of gains that helped power major indexes to records early in the year. Many remain optimistic that stock prices could bounce back, or at least stabilize, once companies report first-quarter earnings.

Even though their prices have fallen recently, bonds from tech companies, like corporate bonds more broadly, have rarely offered lower yields, reflecting a backdrop of solid economic growth, still-accommodative monetary policies, and a low corporate default rate.

One reason why tech bonds have outperformed the broader bond market in recent weeks is that they tend to have relatively high credit ratings, analysts say.

For all of the negative headlines, tech bonds still are a "pretty good safe-haven," said Jordan Chalfin, a senior analyst at research firm CreditSights.

"There's a lot of headline risk, mostly regulatory, that I think could have implications for the upside on equities, but I don't think anyone is questioning the sustainability of these businesses," he said.

The strength of the technology sector is evident in specific bonds. For example, Alphabet's 1.998% notes due 2026 traded Tuesday at 90.793 cents on the dollar, down from roughly 94 cents at the start of the year, according to MarketAxess. The bonds, however, are only trading that far below par because they were issued in the summer of 2016, when benchmark Treasury yields were hovering around record lows. Since then, prices have fallen as yields rose along with those of Treasurys.

Still, the bonds yield just 0.51 percentage point above the comparable Treasury note, up from 0.36 percentage point at the start of the year but below the 0.68 spread at which they were issued.

Meanwhile, Tesla bonds rebounded off all-time lows Tuesday after the electric-car maker said it had made progress building its first mass-market sedan.

Tesla's 5.3% senior unsecured notes due 2025 traded Tuesday at 88.25 cents on the dollar, up from 87 cents on Monday.

In contrast to tech giants like Alphabet, analysts say Tesla could face near-term liquidity problems if its equity and debt falls too far because it has depended on the capital markets to fund operations as it burns through billions of dollars of cash. Tesla shares have fallen roughly 14% this year, a larger drop than the S&P 500's 2.2% decline.

Still, even before they ticked up Tuesday, Tesla's bonds weren't trading at levels that suggested investors weren't anticipating a crisis. At current prices, the 5.3% bonds yield around 7.4%, according to MarketAxess. That is just a little above the average 6.2% yield of all junk-rated bonds, according to Bloomberg Barclays data.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

April 03, 2018 18:10 ET (22:10 GMT)

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