Credit Markets Appear to be Stabilizing (April 9, 2020)

We wanted to update our investors on the signs of stabilization we have seen in bond markets over the last two weeks. The pandemic’s effect on the stock market is easy to see: just check stock prices. The same periods of distress may be harder to see in bonds, but the bond markets have been through their own ordeal between late February and late March. In particular, credit markets, meaning the market for bonds issued by companies, have been on a volatile ride.

It’s crucial to have functioning credit markets in our economy. Many corporations normally depend on bonds to fund their business activities. When the markets go through a major shock, those funding sources can suddenly seize up, leaving borrowers in the lurch just when they need funding the most. Indeed, the credit markets went through this kind of distress in the last month.

Thankfully, policymakers at the Federal Reserve (“Fed”) and in Congress made a number of good decisions, enacting swift and sweeping tools and programs to help markets continue to function effectively. We believe the credit markets have responded very well to these moves in the last two weeks. Here are some of the signs we have seen that reassure us that credit markets are back to functioning to some degree of normalcy:

  • The spreads on investment grade bonds have come down somewhat. The credit spread, which is the difference in yield between corporate bonds and U.S. Treasuries, is an important barometer of market health. Investment-grade (rated BBB or better) spreads to U.S. Treasuries shot higher in early March, but have since narrowed by a reassuring 0.82%.
  • Company borrowers are finding market lenders. New issuance of investment-grade debt hit a record high for a single month in March. Investors’ demand for corporate debt resurfaced, which we believe is great news as it suggests that the Fed’s actions are restoring confidence to investors.
  • Yields for short-term bonds are normalizing. Investment-grade credit curves have stabilized and begun to steepen. We believe this indicates that investors are more comfortable taking on front end (i.e. short-term) corporate credit risk.
  • The market for commercial paper is restored. After coming to a standstill weeks ago, the crucial commercial paper market has returned as a result of the Fed’s backstop.

We believe these are all positive signs that the Fed’s actions and Congressional measures (the CARES Act) have provided the necessary liquidity into the short end of the markets, helping to fund the operations of public and private entities.

A functioning, liquid and fluid credit market is good news for the health of the U.S. economy.

Debt securities are subject to interest rate risk, credit risk, extension risk, income risk, issuer risk and market risk. The value of U.S. government securities can decrease due to changes in interest rates or changes to the financial condition or credit rating of the U.S. government. Investments in asset-backed and mortgage-backed securities are also subject to prepayment risk as well as increased susceptibility to adverse economic developments. High-yield, lower-rated securities involve greater risk than higher-rated securities.