January 24, 2022

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Surging Ford Bonds Lead Credit Market Rally After Fed Rescue

(Bloomberg) — Credit risk eased dramatically now that the Federal Reserve’s unprecedented effort to save corporate debt just got even bigger, adding a backstop to what could be hundreds of billions of dollars worth of bonds that are expected to fall to junk.

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 Co. that will now have the support from one of the biggest sources of demand in the world. Its bonds posted the biggest gains in the high-yield index, with its 7.45% debt due 2031 up 18 cents on the dollar, according to Trace. The cost to protect the automaker’s debt against default for five years dropped nearly 200 basis points to around 771 basis points, according to ICE Data Services.

Ford is so far the largest fallen angel of this cycle with more than $37 billion entering the Bloomberg Barclays 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, and credit raters are downgrading companies at the fastest pace since the great financial crisis. But the Fed’s program won’t catch all fallen angels, like Occidental Petroleum Corp., which received its second high-yield rating March 20.

Read more: Federal Reserve’s Fallen Angel Bond Buying Won’t Catch Them All

Derivative indexes that track credit default risk eased notably, 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 nearly 4 points, while investment-grade is about 23 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 through Wednesday.

“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.


Credit risk gauges eased following the Fed’s additional injection to buy some junk bonds. There were no new deals ahead of the holiday weekend, and markets closed at 2 p.m. in New York.

High-yield funds received another inflow, this time much smaller at $214 million for the week ended April 8, compared to a record $7 billion the prior week, according to Refinitiv Lipper. Investment-grade funds saw another large outflow of $15 billionSome of the hardest-hit parts of the financial world are finally getting a boost after the Federal Reserve expanded its unprecedented support of credit markets to include the debt of riskier borrowersReal estate investment trusts that buy private mortgage bonds, business development companies that lend to small or highly leveraged companies and funds that hold some of the riskiest types of complex debt all surged on ThursdayCaterpillar is in discussions with banks to raise a new $3 billion 9-month revolving credit facilityWells Fargo has been forced to step back from lending to some of America’s biggest companies because of a regulatory cap that restricts its ability to keep growingPrivate equity behemoth Apollo is marketing a roughly $500 million CLO and is looking to price it today


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 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.

LVMH’s sale of 1.5 billion euros of five-year notes last week pulled in orders of nearly six billion eurosAt the same time, investors can’t get enough of the corporate deals on offer, with Schneider Electric SE pulling in orders for 15 times the size of its 500 million euro note offering on April 2Primary market sales slowed to a trickle on Thursday, with just two deals from Bank of Nova Scotia and Nordic Investment Bank in the market. The deals will push weekly sales volumes to at least 36.5 billion eurosBritish Airways’ credit rating was cut one notch to junk by Fitch Ratings, potentially complicating the IAG SA-owned carrier’s access to new loans amid a sharp slump in global aviationA measure of high-grade corporate default protection costs fell for a fourth day; the Markit iTraxx Europe index has dropped about 14 basis points this week after spiking during MarchSpreads on euro IG company bonds have dropped to 224 basis points: that’s still nearly double levels at the start of March


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.

Sentiment is improving, with traders indicating a tightening in bond spreads and falling default-swap costs. The underperformance of Indonesia’s recently-sold dollar bonds compared with the broad market weighed on investors’ moodMalaysia’s oil giant Petroliam Nasional Berhad is waiting in the wings to bring a jumbo dollar bond, but funding is by no means cheap and spreads on Asia dollar notes are still around the highest in over a decade, according to a Bloomberg Barclays indexNew sales have mainly been focused on investment-grade borrowers, from the Republic of Indonesia to South Korea’s Shinhan Bank. The junk bond market has been slower to re-open, with spreads around the highest in at least a decadeThe Markit iTraxx Asia ex-Japan index of CDS tightened about 6 basis points on Thursday, according to a trader. The index is set to tighten this week after jumping 21 basis points last week

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