Even as the number of jobless claims soar, companies around the globe are capitalizing on investors’ thirst for debt by moving ahead with larger and riskier bond offerings.
T-Mobile US Inc. is selling $19 billion of bonds in the year’s second-largest sale, while the high-yield market is coming back to life with three new deals, including one from Tenet Healthcare Corp. T-Mobile and Tenet announced their debt offerings just ahead of what turned out to be 6.6 million more Americans applying for unemployment benefits, double last week’s record. More borrowers like VMware Inc. and Ross Stores Inc. came forward after that, on top of 17 in Europe.
Issuers are seeing a resurgence in risk appetite, as massive demand for new issues has allowed companies to go bigger and bolder with their debt offerings. Cruise line operator Carnival Corp., though technically investment-grade rated, was able to draw massive demand from high-yield investors for a bond sale that ended up being larger and cheaper than expected. Junk bond funds are expected to see a record inflow this week when Refinitiv Lipper reports data later Thursday, reversing six straight weeks of outflows.
There are two important factors at work in the investment grade market. The first is interest rates might be zero, economies under duress and anxiety high but investors still need to capture yield and cashflows. The second is the Federal Reserve is backstopping purchases of investment grade debt so investors now have a measure of security in purchases that did not exist two weeks ago.
The iShares iBoxx Investment Grade ETF (LQD) unwound is very wide overextension relative to the trend mean and is now pausing.
The iShares iBoxx High Yield ETF (HYG) also bounced but not by nearly as much. After all the Fed is not buying high yield bonds, yet. The pace of defaults is certainly likely to increase and the lack of overt government assistance is likely to attract a spread trend which should continue to put upward pressure on high yield spreads.