美联储亲自背书，疫情期间，企业债或可避险

After a wrenching couple of weeks of markets volatility, the question uppermost in most investors’ minds is, Is it safe to get back in the water yet?

The answer—it depends on the part of the beach.

There are still red flags flying above vast swaths of the equities market, notably in cyclical stocks or loss-making startups, especially if the business in question depends on customers sharing an enclosed space with a stranger. Then there’s the travel sector, where the prices are bargain-basement but where it hardly makes sense to accept equity risk until you know the terms of the looming bailouts. The government is unlikely to line up behind you when it comes to being paid.

But there are stretches of the beach where the water is relatively clear and the tide is gentle, and which are patrolled by, if you’ll pardon the analogy, a very well-equipped lifeguard.

Investment-grade debt

The market for high-quality corporate debt appears to have taken a decisive turn since the last week of March. That rebound followed the Federal Reserve announcement to back-stop the segment for the first time in history, buying bonds both at their issuance debut and in the secondary market to ensure liquidity.

It’s hard to overstate the importance of that, both in the symbolic and practical terms of market arithmetic. The Fed had lent against, but never outright acquired, private credit risk during the Great Financial Crisis of 2008–09. This time, the Fed was explicitly telling investors in private securities that it had their back.

It wasn’t merely lip service. The move unfroze the market almost immediately. In the final week of March, investment-grade corporates issued some $109 billion in new bonds, according to Refinitiv data, with deals from well financed companies as diverse as Nike, Oracle, Procter & Gamble, and Home Depot.

Immediately before, all had been mayhem. Faced with losses and margin calls elsewhere in their portfolios, investors had been forced into selling bonds and bond-backed ETFs. Even stalwarts such as iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) sank with the rest of the market turmoil when investors took $218 billion out of steady fixed-income funds in the first two weeks of March.

That huge sell-of inevitably created opportunities: BlackRock had to sell bonds at distressed prices to honor redemption demands from investors in its flagship iBoxx Investment Grade Corporate Bond Fund. The fund’s shares fell 22.2% in the first two weeks of March—the sharpest drop in 11 years. That selling drove a near-doubling of yields on benchmark indexes for investment-grade corporate debt from around 2.4% at the start of the month to as much as 4.6%. (Remember: Bond yields rise as prices fall.) Now, an asset class that looked expensive to many at the start of the year (13% of fund managers in Bank of America’s monthly survey called it the most “crowded trade” in town), is suddenly offering value.

To wit, LQD is up nearly 15% since the Fed intervention, and trading has been far less volatile as investors pour back into the bigger ETFs in this group that count plenty of solid IG-rated assets under their umbrella.

Solid returns in the long run

Past experience suggests the announcement of the Fed’s safety net should ensure a period of outperformance for investment-grade vis-à-vis high-yield debt, also known as junk. That’s because defaults are more likely to rise in the junk space as the economic outlook worsens. In a weekly note after the Fed’s action, analysts at Moody’s warned that the junk default rate could top 16% in a recession, similar to what we saw in 2009 at the height of the Great Recession.

There are still plenty of pitfalls ahead, Goldman Sachs analysts Zach Pandl and Kamakshya Trivedi warn. A decade ago, they argued in a recent note to clients, the broader market didn’t bottom until the economy itself did in March 2009—some six months after peak volatility coinciding with the collapse of Lehman Brothers.

“We expect something similar this time around. It will therefore be increasingly important to differentiate between assets that are ‘inside the tent’—essentially backstopped by policy support—and those that will require better economic news and/or better valuations to stop falling,” they added.

Ratings firm Moody’s seems inclined to agree. “Rating actions will be more tempered for higher-rated companies that are likely to benefit from policy intervention or extraordinary government support,” Moody’s wrote in a weekly note after the Fed action. “We view government support as likely for sectors of strategic or significant national importance.”

There is some precedent for that statement. European Central Bank researchers found that investment-grade corporates outperformed high-yield clearly for six months after the ECB first announced it would buy corporate debt in 2016. That premium didn’t last forever, it should be noted. The spread between eligible and noneligible bonds narrowed back to near zero in the 12 months after that, as the sense of crisis passed and investors, looking for better returns, once again grew more confident about holding higher-risk debt.

Things could be different this time.

For starters, there is a big difference between the eurozone in 2016 and the U.S. in 2020. The overall credit rating of U.S. investment-grade debt is dangerously low. David Norris of TwentyFour Asset Management points out that $3.2 trillion in notional outstanding bonds is rated between BBB+ and BBB–, the three lowest investment-grade notches. That $3.2 trillion is bigger than the entire eurozone investment-grade universe. Much of it, Norris notes, is owed by an oil and gas sector whose cash flows are vanishing fast, thanks to the unremitting oil price war triggered by Saudi Arabia and Russia.

It would take only one or two downgrades to push those BBB bonds into “junk territory," forcing a wave of selling from fund managers with IG-only mandates, dramatically reducing their access to capital, driving up borrowing costs, and ultimately threatening defaults.

In the past month alone, in which the junk bond market has been effectively closed, both Ford Motor and Occidental Petroleum have become so-called fallen angels: cut off from funding markets just as buyers for their products dry up because of the virus and the price war. Such companies have limited choices—ask for a government bailout, or to hope there’s still some cash left when the economy finally turns up again.

A good investor, or a lucky one, might enjoy riding some of those waves in the next few months. But prudent ones will want to stay where the lifeguard can see them. That part of the beach is where the sure-footed investment-grade corporates can be found.