‘No signs of panic’ among Corporate America debt investors, even with market turmoil

Debt investors in big US companies aren’t panicking, even as the equity turmoil threatens to land the S&P 500 in correction territory.

Investment-grade corporate bond spreads came under continued pressure at the start of the week, with many investors expecting the Federal Reserve to provide a clearer roadmap on Wednesday to hike rates and shrink its balance sheet closely. $8.8 trillion to fight inflation.

But Matt Brill, head of investment grade for North America at Invesco, pointed out that investment-grade corporate bonds have generally outperformed equities, despite the recent market turmoil, and “see no sign of panic. “.

The closely watched iShares iBoxx $ Investment Grade Corporate Bond ETF LQD,
-0.15%
was down 3.1% on the year to Tuesday, compared to the S&P 500 index above SPX,
-0.90%
9% decline in January and COMP of the Nasdaq composite index,
-1.65%
14% drop into correction territory to start 2022.

“Company fundamentals are still very strong,” Brill told MarketWatch. “Companies have the ability to add leverage or refinance existing debt without too much downgrade risk.”

Companies also borrowed a record amount in the U.S. corporate bond market during the pandemic at ultra-low rates, resulting in strengthened balance sheets and an even higher cash stack of around $340 billion at US levels. before 2020 (see graph), in the third quarter, according to BofA Global.

Highly rated U.S. companies, after excluding financials and utilities, still had a cash reserve of more than $1.6 trillion in the third quarter.

BofA Global

With the recent rate sell-off and widening credit spread, Brill said “yields are still historically low,” making it “tempting for companies to borrow,” especially at the start of 2022. because issuers fear higher rates.

That said, businesses could face a less supportive Fed when it comes to stabilizing jittery stock and bond markets, as the central bank focuses on bringing inflation down to an annual rate of 7%.

“I think the real economy should do better than financial assets this year,” Mark Heppenstall, president and chief investment officer at Penn Mutual Asset Management, said in a phone interview.

“The Fed clearly wants to keep credit available and does not want financial instability. But I think they’re going to have a lot more tolerance than recently for weak credit markets, given that inflation is now at a level where the Fed has to deal with it.

See: With stocks in New Year’s slump, where’s the ‘Fed put’? Why policymakers aren’t rushing to save

The 10-year Treasury rate TMUBMUSD10Y,
1.784%,
a benchmark for pricing corporate bonds and a host of other debt instruments that underpin the economy, was at 1.76% on Tuesday.

That’s up nearly 25 basis points on the year, with high expectations for Fed Chairman Jerome Powell this week to provide more guidance on how quickly the central bank plans to cut. its balance sheet and raise rates from the current range of 0% to 0.25%. .

Read: How Jerome Powell could try to calm the market’s frazzled nerves

“What I would have liked to see were rate hikes three months ago and the end of QE three months ago,” David Norris, head of US credit at TwentyFour Asset Management, said of the report. Fed quantitative easing, or large-scale easing. bond buying program over the past two years.

“Hopefully they end QE,” Norris said by phone. “Hopefully they will implement a 25 basis point rate hike because after that January meeting there are still six weeks until the next meeting.”

“There is a real fear now that inflation will cause demand destruction, which would not be good.”

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