Fed Gives Lift to Corporate Bonds
20 June 2019 - 6:11PM
Dow Jones News
By Sam Goldfarb
The Federal Reserve's latest messaging is turning out well for
corporate borrowers and the investors that buy their bonds.
Signals from the Fed on Wednesday that it could soon start
cutting interest rates not only sent Treasury yields tumbling but
also led investors to demand less of a premium, or spread, to hold
corporate bonds over U.S. government debt.
That translates to an inviting environment for companies to
issue new debt -- consistent with the Fed's goal of preserving the
economic expansion and giving a boost to inflation.
While falling Treasury yields often can be a sign of economic
problems and cause spreads to widen, many investors are optimistic
that the U.S. economy can continue to grow with the Fed's help.
That has provided a lift to both stocks and corporate bonds.
As of Wednesday, the average investment-grade corporate-bond
spread was 1.23 percentage points, according to Bloomberg Barclays
data, down from 1.24 percentage points a day earlier. The average
yield on those bonds -- a barometer of the cost of issuing new debt
-- fell to 3.26%, the lowest level since January 2018.
Yields fall when bond prices rise.
On Thursday, both spreads and yields on some of the most
actively traded corporate bonds continued to decline. Recently
issued Fiserv 3.5% bonds due in 2029 traded in the late morning at
a spread of 1.26 percentage points, down from 1.33 percentage
points Wednesday, according to MarketAxess. That came even as the
yield on the 10-year Treasury note fell below 2.0% for the first
time since 2016.
"In this environment, where financial assets are all moving in
the same direction, it's incredibly beneficial to [debt] issuers,"
said John Sheehan, a fixed-income portfolio manager at Osterweis
Capital Management.
Riskier corporate bonds also were in demand following the Fed
meeting. The average speculative-grade corporate-bond spread fell
to 3.84 percentage points Wednesday from 3.87 percentage points a
day earlier.
Eight-year Avis Budget Car Rental bonds, issued at par with a
5.75% coupon on Wednesday, recently traded at 100.75 cents on the
dollar, according to MarketAxess. That translated to a yield of
5.632% and spread of 3.65 percentage points.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
(END) Dow Jones Newswires
June 20, 2019 12:56 ET (16:56 GMT)
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