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The central bank will expand its bond-buying program to include debt that was investment-grade rated as of March 22 but was later downgraded to no lower than BB-, or three levels into high yield, according to a statement Thursday. It’ll also buy exchange-traded funds that track speculative-grade debt, which surged the most in a decade following the announcement. All together, the programs will support as much as $850 billion in credit.
These latest steps provide a huge lifeline to companies like Ford Motor (NYSE:F) Co. that will now have the support from one of the biggest sources of demand in the world. Its bonds are posting the biggest gains in the high-yield index, with its 7.45% debt due 2031 up 15 cents on the dollar, according to Trace. The cost to protect the automaker’s debt against default for five years dropped more than 17 basis points to 953 basis points, according to ICE (NYSE:ICE) Data Services.
Ford is so far the largest fallen angel of this cycle with more than $37 billion entering the Bloomberg Barclays (LON:BARC) high-yield index this month. Strategists say that’s just the tip of the iceberg, with most expecting the total to exceed $200 billion this year.
Derivative indexes that track credit default risk are notably easing, especially in high yield, which wasn’t originally part of the Fed’s program that was unveiled on March 23. The junk CDX is up more than 3 points, while investment-grade is nearly 15 basis points tighter.
The new purchases will likely add to what’s already been a substantial rally in credit since the Fed first stepped into the market. Investment-grade spreads have compressed 120 basis points since then, and high-yield spreads are about 230 basis points tighter.
“I’m sure there will be all sorts of reasons to ‘fade’ this rally in credit and equities, but I completely disagree,” said Peter Tchir, head of macro strategy at Academy Securities. “I’m already in risk on mode, but wouldn’t be afraid to add more.”
Many investors thought the Fed’s initial program was right to just focus on investment-grade debt, as those companies tend to be the biggest employers and more systemically important to financial markets. But the expansion opens up a whole new set of securities that are on the cusp of junk, where the Fed will step in as a buyer in a sea of forced selling.
U.S.
Credit risk gauges are easing following the Fed’s additional injection to buy some junk bonds. There are no new deals ahead of the holiday weekend, and markets close at 2 p.m. in New York.
Europe
When LVMH issued new euro bonds on April 1, the spread it paid had quadrupled from when it was last in the market in early February, according to data compiled by Bloomberg. Earlier today, Berkshire Hathaway (NYSE:BRKa) sold 10-year yen bonds at a yield premium of 105 basis points, more than double the 50 basis points it paid to sell similar-maturity notes a little over half a year ago.
Asia
In Asia, corporations have been slower to return to the market but a $10 billion sale from Qatar this week amassed about $45 billion of investor orders. It too paid a premium over its existing notes to get the deal done.
©2020 Bloomberg L.P.
