Spread-focused high grade corporate bond investors had a tough time during the interest rate rising cycle, so it is no surprise that when the opportunity comes to clobber borrowers in a sector facing operational problems, they’ll grab it with both hands.
Negative yields existed in European investment grade corporate bonds until April 2022, but the steep monetary tightening phase made them a distant memory.
This week, Comcast, the A3/A-/A- rated US entertainment company, for example, paid 3.293% on an eight year euro issue.
Great for investors — unless the return you care about is spread. This has only tightened while yields have soared, despite multiple investors betting spreads would widen substantially this year.
On September 23, 2022, the iTraxx Europe Main index of investment grade credit default swaps closed at 130bp, the Crossover at 637bp.
On Tuesday, they opened at 58bp and 311bp.
The reason is the endless torrent of cash that has poured into high grade corporate debt all year — drawn by those selfsame high yields.
Besides that, IG corporate debt has a Goldilocks charm, with spreads wide enough to mitigate some interest rate volatility (unlike those on sovereign, supranational and ageny bonds), yet still from rock solid companies with little or no chance of default (unlike high yield and emerging markets).
So if a chance arises to let a little more spread into the market, investors are going to take it.
Vroom goes boom
Europe's car market is facing its own difficulties. BMW has undergone a €1bn product recall and Volkswagen is reportedly considering closing German factories for the first time.
These problems look like they’ll be contained to those two companies. But investors have spoken with their wallets and spreads across the sector have moved wider.
Last week, Daimler Truck — which makes lorries, not cars, but investors do not seem to have made the distinction — landed a successful 2030 bond issue 20bp wide of where similarly rated infrastructure credit APRR printed a 2034 note the same day.
Daimler Truck paid 5bp-8bp of new issue concession, meaning its deal was well received in primary.
Bankers on the trade say none of Daimler Truck’s investors raised BMW and Volkswagen's problems during marketing or the bookbuild.
But the secondary spreads suggest what investors are saying and doing are different things.
A similar dynamic played out in the real estate market over the last two years. Strong sub-sectors like logistics and data centres suffered spread widening because of worries around weak sub-sectors like retail property and offices.
Why wouldn't investors do this, particularly at this time of year, when issuance is unusually high and investors have plenty of other bonds to look at?
It's not nice if you’re holding the out-of-favour bonds, but you get to make it up when they print new deals 20bp wide of comparably rated borrowers in more trusted sectors.
The skimpy new issue concessions on some of these deals are more than made up for by higher absolute spreads.
In a world where spreads were far wider, investors would be more willing to only punish the companies facing big difficulties.
But with the razor-thin spreads of 2024, investors need to take what they can get — even if it is a bit unfair on borrowers in good standing who just happen to be in the same sector as the laggards.