Picture: 123RF/COWARD_LION
Picture: 123RF/COWARD_LION

New York — The global credit machine is grinding to a halt.

The $2.6-trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, has come to a virtual standstill as the coronavirus spreads fear through company boardrooms.

In the US, Wall Street banks are facing their third straight day without any bond offerings, a rarity outside of holiday and seasonal slowdowns. European debt bankers had their first day of 2020 without a deal on Wednesday. And bond issuance in Asia, where the virus first emerged, has slowed to a trickle.

It’s a remarkable turn of events for a market where investors had been snapping up almost anything on offer amid a global dash for yield. Europe had been enjoying its strongest ever start to a year for issuance, and sales of US junk bonds have been on the busiest pace in at least a decade.

Company earnings

Credit investors have been rattled by the potential impact on company earnings from disruption caused by the virus, which has seen huge parts of global supply chains shutting down. While markets have yet to see any panic selling, a derivatives index that gauges credit market fear in the US had its biggest jump in more than three years on Monday as investors rushed to hedge against a wider sell-off.

“It’s a coin toss as to what tomorrow will look like, or even the rest of today,” said Tony Rodriguez, head of fixed income strategy at Nuveen. “You have to respect the fact that when you don’t have an information advantage to not make any significant moves.”

Honeywell International, Virgin Money UK  and Transport for London were among the European borrowers readying deals before financial markets turned hostile. Before the slowdown, Europe had seen €239bn of bonds sold in January alone.

The US investment-grade market was expecting about $25bn of sales this week before virus fears froze the market on Monday. Excluding the December holiday season and typical two-week summer hiatus in late August, there has not  been that long of a break to start the week since July 2018.

Offerings also came to a halt in the US junk-bond market, where $67bn  of sales had been running at the fastest pace since at least 2009, data compiled by Bloomberg show. The Canadian market, however, is still open for business as utility company Hydro One  raised C$1.1bn in the largest Canadian dollar bond from a non-financial company in 2020.

It’s a sharp turnaround for primary corporate bond markets around the world, where demand has triggered supply against the backdrop of $14-trillion of negative-yielding debt globally. In the US investment-grade market, $220bn had priced this year through last week, running about 19% ahead of 2019’s pace. Until this week, European issuers had brought at least €30bn worth of sales for the past six weeks in a row.

While a dearth of supply is usually a positive technical for the market, all else equal, spreads have widened as demand has fallen off as well. Borrowing premiums on euro-denominated debt jumped to 95 basis points more than government bonds this week, the highest in 2020, according to a Bloomberg Barclays index. The US index climbed to 107 basis points, the most since November.

US high-yield bonds have not been this cheap on a spread basis since October, but they’re still not an attractive buy given caution on earnings calls, according to Citigroup strategists led by Michael Anderson. The market now trades at 417 basis points over Treasuries, more than a full percentage point wider since January 13, according to Bloomberg Barclays indexes.

Overall borrowing costs remain very low, however. A rally in US Treasuries has sent all-in yields on US investment-grade debt to record lows. US investment-grade funds have reaped near-record inflows each week in 2020, as investors seek high-quality income assets. High-yield and leveraged loan funds, however, have seen more outflows.

The number of coronavirus cases continues to climb, with the global death toll nearing 3,000. US health officials have warned citizens to prepare for an outbreak, while South Korea has also emerged as a hotspot, with more than 1,000 reported cases there.

The worsening crisis is already taking a toll on companies’ balance sheets, with drinks maker Diageo  set to book as much as a £325m hit to organic net sales. In the US, United Airlines Holdings withdrew its 2020 profit forecast on Tuesday as it can’t guarantee its earlier earnings goal.


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