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Letter by Dutch painter Vincent Van Gogh and French painter Paul Gauguin before auction
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Call it the Antiques Roadshow of the corporate bond market.
Even as COVID-19 cases surge to alarming rates and rattle markets, debt investors in November have been rummaging through the U.S. corporate bond market for bargains created by the pandemic.
The debt of “fallen angels” Ford Motor F, -1.50% and Occidental Petroleum Corp. OXY, -4.95% was among the most actively traded by midmonth, amid an overall sea of green for U.S. speculative-grade, or “junk-rated” corporate bonds so far in November, according to data from BondCliq.
Both the debt-laden Ford and oil and gas producer Occidental saw their coveted investment-grade credit ratings cut to junk territory, or BB+ or lower in March as the coronavirus bore down on the U.S.
This chart shows the top 24 U.S. junk-bond issuers by trading volume so far in November, with Ford’s debt the most actively traded.
Top 24 junk-bond trades in Nov.
BondCliq
Green colors indicate a broad rally in bonds from Nov. 2 to Nov. 12, even though the Dow Jones Industrial Average DJIA, -1.08% was down 1.3% on Thursday and the junk-bond market was selling off.
The iShares iBoxx High Yield Corporate Bond ETF HYG, -0.65% was down about 0.5% Thursday, but still up 1.7% for the month, according to FactSet. The VanEck Vectors Fallen Angel High Yield Bond ETF ANGL, -0.45% slumped 0.5% Thursday, but was on pace for a 2.5% monthly gain.
BondCliq data also shows that nearly $50 billion worth of junk-bonds traded already his month, a 16% uptick from the same period of October.
The continued hunt for bargains followed a dramatic selloff in October for equities and debt markets, as parts of Europe rolled out fresh curfews and restrictions on social gatherings as COVID-19 infections hit records.
And alarming new milestones in the pandemic this week, including fresh curfews on bars and restaurants in New York City and elsewhere, cut into a rally in riskier assets sparked earlier in the week by promising developments on the COVID-19 vaccine front.
Read: Why stock-market bulls can’t ignore rising COVID cases despite vaccine optimism
But what might be another period where bad news may be good news, debt investors looking for fallen angel bargains could be in luck, particularly as already struggling corporations grapple with the added shocks of the pandemic.
“We couldn’t be more excited as fallen angel and high yield investors,” said Manuel Hayes, senior portfolio manager of Mellon’s Efficient Beta Fallen Angels strategy. “In our view, the more downgrades there are the more discounts are available for those who can cost effectively and efficiently harvest this opportunity set.”
This year already has seen some $170 billion of formerly U.S. investment-grade corporate debt downgraded to junk-bond territory, according to BofA Global analysts, who expect another $50 billion to cross over in the next 12 months.
The potential for a deluge of corporate debt downgrades that could swamp the junk-bond market has been a key concern for investors, central bankers and regulators for years.
Those worries turned feverish this spring, after states and cities across the nation ordered businesses to temporarily close in a bid to contain the first wave of U.S. COVID-19 outbreaks.
Read: Why corporate credit is in the spotlight as governments weigh economic stimulus
But sentiment around corporate debt also quickly shifted to bullish from bearish after the Federal Reserve in April expanded its foray ever into buying corporate debt to include “fallen angels,” as it looked to stabilize markets that began to spiral out of control in March.
Hayes pointed out that as bonds pass from investment-grade to junk territory, they can create a wave of forced selling, because many investors often lack a mandate to own both types of debt, but when oversold this creates an opportunity for other investors to buy cheaply.
Kohlberg Kravis Roberts & Co.’s KKR Credit also pointed out that fallen angles produced an eye-popping 31.3% total return in the highly volatile stretch from the March 23 pandemic low to Sept. 30, which compared with a 18.42% return for investment-grade corporate bonds, in a note recapping third-quarter performance.
