Written by: Tim Benzel, CFA, VP & Sr. Portfolio Manager
Headlines were made last week when investment-grade bond sales hit $1 trillion in 2020, a record pace that is nearly double the amount issued through the same period last year. This is occurring despite tremendous economic uncertainty, and it is causing investors to question the disconnect between the financial markets and the real economy.
The party started in mid-March, during the heart of the crisis period for the markets, when two of the largest and best-known issuers, Exxon Mobile and Verizon, came to the market with large deals. The success of those deals, where the order books far exceeded the amount issued and the performance after issuance was strong, opened the floodgates for other corporations to follow. The fun has continued ever since.
These deals priced shortly after the Federal Reserve announced support for the corporate market via a primary market facility, where corporations have the ability to borrow directly from the Fed, and a secondary market facility, where the Fed purchases bonds and ETFs on the open market. The impact these programs have had on the marketplace cannot be understated as they’ve given investors’ confidence that the probability of downside performance is limited with the Fed actively involved and have allowed companies to raise significant amounts of cash coming into the recession. And even though the secondary facility just started purchasing ETFs, and the Fed has yet to make a loan via the primary facility, corporate bonds have rallied sharply. Confidence is key.
We have participated in many of the new corporate deals over the last several weeks and will look to selectively continue this activity in the weeks ahead. As the market has rallied however, we are becoming less thrilled with the levels on these deals and are seeing better relative value in other sectors of the taxable bond market, namely taxable municipals, which has been a long-standing favorite of ours.
Source: Bloomberg as of May 29th, 2020
Related: Bank of America COVID-19 Social Bond - A Sign of the Times