By Sebastian Pellejero and Sam Goldfarb
Investors snapped up the debt of car makers, oil drillers and
other wounded companies after the Federal Reserve said it would
lend trillions more to support the U.S. economy.
The Fed's new lending programs are aimed at commercial loans,
mortgages, cities, states and companies. They helped push up the
iShares iBoxx $ High Yield Corporate Bond ETF, an exchange-traded
fund tracking junk bonds, 6.6%, according to FactSet. The iShares
investment-grade bond ETF rose 4.7%.
And investors now judge a wide swath of companies less likely to
default on their debts: the cost of protecting $10 million of
below-investment-grade corporate bonds against default for five
years using credit-default swaps dropped sharply to around $525,720
as of Thursday's close, from $619,470 on Wednesday, according to
IHS Markit's CDS index. For investment-grade bonds, that cost fell
to $81,550, from $105,030 at Wednesday's close.
The Fed's move was the latest in a series of extraordinary
interventions in financial markets aimed at mitigating the economic
fallout from the coronavirus crisis. Those have included cutting
interest rates to near zero and buying billions in Treasury
securities, moves many analysts said demonstrate the central bank's
commitment to ensuring smooth market functioning.
"The Fed has essentially walled off large sectors of the
fixed-income markets. Investors are riding that momentum and
jumping into those asset classes," said Bryan Whalen, a
fixed-income portfolio manager at TCW Group Inc. "If there's
further volatility due to the economic downturn, then there will be
more money."
Prices for debt from companies including Ford Motor Co.
registered especially large gains after the Fed said it would buy
new and existing bonds from fallen angels -- newly downgraded
corporations that had carried investment-grade ratings from two out
of the three major ratings firms through March 22. The central bank
had previously said it would only buy investment-grade bonds with
shorter-term maturities.
Ford's 7.45% bonds due in 2031 finished up at 89.5 cents on the
dollar after the Fed's announcement, according to MarketAxess,
compared with 71 cents Wednesday. The auto maker has more than $36
billion in outstanding bonds, making it the single largest issuer
in high-yield.
Other potential beneficiaries include Continental Resources Inc.
and Western Midstream Operating LP, which lost their
investment-grade status after March 22. Continental Resources' 4.9%
bonds due in 2044 climbed to 73.375 cents from 61 cents.
"In the investment market, there's never surety, but this
provides a little more stability, liquidity and clarity," said
David Albrycht, president and chief investment officer of Newfleet
Asset Management.
Just the promise of the Fed's intervention has reignited the
corporate-bond market in recent weeks. Companies issued more than
$105.3 billion in investment-grade bonds in the past month, said
Bank of America Global Research, with $37.7 billion of that
occurring in the week ended Wednesday.
Meanwhile corporate-bond spreads, or the extra yield over U.S.
Treasurys that investors demand to hold company debt, have fallen
in recent weeks. After hitting a high of 3.73 percentage points on
March 23, the spread for the Bloomberg Barclays U.S. Corporate
Investment Grade index is now down to 2.53 percentage points as of
Wednesday, according to FactSet.
The spread for the Bloomberg Barclays high-yield index is down
to 8.71 percentage points as of Wednesday from a high of 11% on
March 23.
In addition to lower-rated corporate bonds, the Fed said it will
now allow purchases of new classes of debt that were excluded in
the central bank's response to the 2008 financial crisis. These
include purchases of triple-A-rated tranches of existing commercial
mortgage-backed securities and newly issued collaterized loan
obligations.
The Fed also plans to purchase as much as $500 billion of
short-term debt directly from U.S. states and large cities and
counties to prop up the nearly $4 trillion municipal market, which
is seeing some signs of recovery after slowing to a standstill last
month. The Fed will buy bonds with maturities of up to two years,
it said.
The announcement is likely to disappoint some brokers, asset
managers and government finance-officer trade groups that had
advocated for the Fed to support much longer-term bonds and a much
wider range of borrowers. The Fed said it would continue to monitor
the market and whether additional measures are needed.
Florida Bond Director Ben Watkins called the program "a great
start" but said the Fed should support bonds maturing in up to 30
years as well as the debt of smaller communities. Only cities of
more than one million residents and counties of more than two
million residents are eligible for the program.
"This virus affects very small communities, as well," Mr.
Watkins said. "What are you going to do about small rural counties
and school districts?"
In government-debt markets, the yield on the benchmark 10-year
Treasury note fell to 0.722%, from 0.762% at Wednesday's close,
according to Tradeweb. Meanwhile the 30-year yield traded to 1.348%
from 1.362% the previous day.
--Heather Gillers contributed to this article.
Write to Sebastian Pellejero at sebastian.pellejero@wsj.com and
Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
April 09, 2020 17:22 ET (21:22 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.