By Sam Goldfarb
Blue-chip U.S. companies are having an easier time issuing new bonds, a sign of improving conditions in some parts of the credit markets after a series of extraordinary Federal Reserve interventions.
Business giants including Nike Inc., McDonald's Corp. and Pfizer Inc. were among those that sold bonds Wednesday, following in the footsteps of Comcast Corp. and Mastercard Inc. a day earlier. In a sign of increased demand among investors, the companies issued the bonds at significantly lower yields than their initial offers at the start of the day.
Even though companies sold a large amount of investment-grade bonds last week, they were forced to pay such high interest rates that it only added to concerns about a breakdown in credit markets, as investors reeled in response to the spread of the coronavirus and the aggressive measures taken by public authorities to contain it. In the weeks before that, corporate bond sales had all but ground to a halt earlier in the month, underscoring how the virus was threatening businesses by disrupting financial activity.
Improvement in the investment-grade corporate bond market follows the announcement by the Fed on Monday that it would buy unlimited amounts of government debt and create new facilities to buy new and existing corporate bonds that carry investment-grade ratings.
"With the backstop from the Fed, I think it helps meaningfully," said Gene Tannuzzo, deputy global head of fixed income at Columbia Threadneedle.
Nike on Wednesday sold $1.5 billion of 10-year notes at a yield 2 percentage points above comparable U.S. Treasurys, down from initial guidance of a spread of 2.5 percentage points. McDonald's sold $1 billion of 10-year notes at a spread of 2.85 percentage points, down from initial guidance of 3.35 percentage points.
The yield on the benchmark 10-year U.S. Treasury note settled at 0.854%, according to Tradeweb, compared with 0.813% Tuesday. Yields rise when bond prices fall.
In another sign of a healthier market, companies on Tuesday sold their new investment-grade bonds at an average spread that was just 0.037 percentage point above the spreads on their existing bonds, according to BofA Global Research. That was down from 0.37 percentage point Monday and roughly 0.5 to 0.8 percentage point last week.
The cost of protecting corporate bonds against default using credit-derivative indexes has also declined this week. It cost around $101,500 a year to protect $10 million of U.S. investment-grade bonds against default for five years on IHS Markit's CDX index, down from Tuesday's close and significantly lower than Friday's $151,000.
Signs of severe stress in credit markets remain, however.
As of Tuesday, the average investment-grade corporate-bond spread was 3.53 percentage points, up from 1.07 percentage points a month ago, according to Bloomberg Barclays data. Fifty-seven percent of speculative-grade corporate loans are now priced below 80 cents on the dollar, compared with just 4% at the end of last year, according to LCD, a unit of S&P Global Market Intelligence.
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