U.S. junk bond yields rode a rally in risk assets to a record low on Monday, as investors—buoyed by a Joe Biden presidential victory and progress toward a Covid-19 vaccine—poured into the debt of riskier companies.
The average yield for the Bloomberg Barclays U.S. corporate high-yield index plummeted to 4.56 percent, sinking below the previous record of 4.83 percent set in June 2014. The 45 basis point (bps) decline from Friday’s close was the steepest fall since April 9, when the Federal Reserve expanded its corporate bond purchases to include some junk debt.
Biden’s victory, declared by the Associated Press on Saturday, and news that a large-scale study for a coronavirus vaccine developed by Pfizer Inc. and BioNTech SE prevented over 90 percent of infections, accelerated a rally that began in the wake of the election last week.
In Asia, average prices of high-yield dollar bonds with longer maturities rose 0.5 cent Tuesday, traders said. That leaves them up for a seventh straight day, the longest streak in more than two months, according to a Bloomberg Barclays index. Investment-grade dollar note spreads in the region fell 5 bps to 10 bps, the most in five months.
“The news of a potential vaccine breakthrough is a major positive for all risk assets, as it raises the possibility of a V-shaped global economic recovery,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd.
Investors are seeking riskier, higher-paying assets on bets that a Biden presidency and Republican-controlled Senate could mean a smaller stimulus package and heavier reliance on the Federal Reserve’s monetary policy of ultra-low interest rates through at least 2023.
Even though the market has already seen a huge rally in high yield, the lack of a “blue wave” means the streak has room to run, said Scott Minerd, chief investment officer at asset manager Guggenheim Investments, on Bloomberg Television on Thursday.
“If you’re a yield-oriented investor, like a mutual fund or an insurance company, the pie at which you can get attractive yields is getting smaller and smaller,” Minerd said. “The more liquidity the Federal Reserve keeps pumping into the system, the more pressure there is for credit spreads relative to Treasuries to contract.”
Investors are still pouring money back into retail funds that buy junk-rated debt, with an estimated inflow of $3.23 billion by Friday’s close, JPMorgan Chase & Co. analysts wrote in a note, citing Refinitiv Lipper. The cash influx was led by HYG, the biggest high yield exchange-traded fund (ETF), which had net incoming cash of almost $1.9 billion. JNK, the second biggest ETF, raked in $511 million.
In Asia, at least four borrowers—including Redco Properties Group Ltd., Guangxi Investment Group, and China National Bluestar (Group)—were marketing dollar bonds to investors on Tuesday.
- Kaisa Group Holdings Ltd and Yango Group got strong orderbooks for their offerings
- Indonesian corporate dollar bonds advanced as the U.S. presidential election triggered a rally across emerging-market assets
Meanwhile, the cost to protect corporate debt against default in both the United States and Europe dropped to the lowest since February.
- Coal miner Peabody Energy warned of a possible bankruptcy, and is in talks with lenders to avert a violation of debt terms.
- YouFit Health Clubs filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court District of Delaware
Deutsche Bank AG, Aegon Bank NV, and Klepierre SA are also among Monday’s 10 debt sellers. Aegon Bank is offering the region’s first covered bond since October 27, according to data compiled by Bloomberg.
- EasyJet, Ryanair, and Airbus are among the biggest bond winners as debt from companies hard-hit by the coronavirus rally on vaccine optimism
- A group of investors is preparing for a correction in Sweden’s credit market, based on an assumption that a lot of real estate bonds are much riskier than they seem
—With assistance from Gowri Gurumurthy, Skyler Rossi, Denise Wee & Ina Zhou.
Copyright 2020 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.