WSJ: Mad rush out of Junk

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Good morning. I’m James Willhite, with Thursday’s markets update as investors track progress on the U.S. stimulus bill—and await jobless claim figures that are expected to soar.

Futures are down, after the Dow eked out its first back-to-back rise since February. The Senate approved the coronavirus relief package and the House will consider it on Friday—President Trump has said he would sign it immediately. But fresh data and efforts from governments around the world could draw focus back to the fact that even amid forceful action to stem the economic impact of the pandemic, the crisis remains very much ongoing.

Meanwhile, our Serena Ng and Xie Yu look at the historic collapse in the prices of junk bonds, and explain why they’ve shown more vulnerability now than even during the financial crisis.

 

Markets in a Minute

Markets Data
 

Overnight Developments

 

Investors Rush Out of Junk Bonds

By Serena Ng and Xie Yu

 

The specter of widespread corporate defaults in the coming months has caused a massive selloff in junk bonds around the world, as many debt-laden companies face the prospect of going weeks or months with virtually no revenue.

Bonds without investment-grade ratings plunged at their fastest pace in history in March, money managers said, stunning investors and hitting levels that portend a deep recession with scores of company failures.

While some junk-bond prices recovered slightly in recent days, investors say the broad declines—of about 20% this month alone—have been exacerbated by Wall Street’s reluctance to help cushion the market by stepping in to buy the bonds and risk getting stuck with them on their books.

Assets of all kinds have tumbled in a blur of tumultuous trading since the novel coronavirus—and a wave of lockdowns and travel halts—went global in early March. Investors worry that heavily indebted companies have a much thinner margin of error and lower odds of weathering the downdraft and emerging in good shape whenever the economy ultimately recovers.

“This is kind of your worst nightmare,” said Raymond Kennedy, a high-yield bond portfolio manager at Los Angeles investment firm Hotchkis & Wiley. “The question is who can survive for how long.” Airlines, hotel operators, gaming companies, restaurant chains and retailers are some of the many companies that have outstanding junk bonds.

Junk bond prices plunged during the global financial crisis, too. But their declines took place over a longer period, and their highly indebted issuers weren’t the source of the problem.

The credit crunch back then was sparked by a meltdown in America’s housing market. Spiking home loan defaults damaged the value of many mortgage bonds and forced investors and banks to dump assets, even as companies outside the housing sector continued to perform well.

The mortgage losses were amplified at banks and insurers that had loaded up on complex investments tied to home loans, and some financial firms collapsed or received government bailouts. A global recession followed and junk bond defaults climbed, but the market snapped back after the crisis eased.

The junk bond market was priced to perfection at the start of 2020. Risky companies were borrowing at near record-low rates relative to U.S. Treasury yields, the culmination of a yearslong reach for higher returns by investors world-wide. They poured cash into a range of risky assets, pushing returns down. Companies took advantage of the flood of money by issuing more non-investment-grade debt.

And the situation now is more dire, money managers said, because the coronavirus pandemic is hammering companies in multiple industries at the same time and hitting those with high debt relative to earnings the hardest.

For a longer version of this article online, follow this link.

Are you adjusting your investments in anticipation of corporate failures? Let us know by replying to this email. Your comments may be edited before publication in future newsletters, and please make sure to include your name and location.

 
 

Market Facts

  • Southern European government bonds rallied Thursday, after the European Central Bank late Wednesday “broke new ground” by giving itself significantly more flexibility on its additional €750 billion ($821 billion) bond-purchase program, according to Florian Hense, an economist at Berenberg Bank. The yield on Greece’s 10-year bonds fell sharply on Thursday, declining to 2.119%, from 2.477% on Wednesday. Italy, Spain and Portugal also saw bond prices climb, leading to lower yields.
     
  • Canada’s largest bank by assets is moving to protect itself as pain spreads through the mortgage market. The Royal Bank of Canada was seeking bids Wednesday for more than $600 million of debt tied to commercial mortgages, according to people familiar with the matter. Mortgage bonds of all kinds have tumbled in value in recent weeks, even those that had top ratings from credit agencies. Investors are worried borrowers will default en masse as the economy slows to a halt.
     
  • On this day in 1979, meeting in Geneva, the Organization of the Petroleum Exporting Countries declared that its members would raise the price of crude oil from $13.34 to $14.55, igniting another round of global inflation.
 

Key Events

The Bank of England releases meeting minutes and a policy statement at 8 a.m. ET.

Group of 20 leaders hold a video teleconference at 8 a.m.

U.S. jobless claims, due at 8:30 a.m., are expected to rocket to 1.5 million from 281,000 a week earlier. That would top the previous record of 695,000 set in 1982.

U.S. advance trade in goods figures for February are out at 8:30 a.m.

U.S. gross domestic product growth for the fourth quarter, due at 8:30 a.m., is expected to advance at a 2.1% pace, unchanged from an earlier estimate.

The Kansas City Fed’s manufacturing survey for March is out at 11 a.m.

The U.S. Financial Stability Oversight Council meets at 3 p.m.

The White House coronavirus task force holds a press briefing at 5 p.m.

China’s industrial profits for February are out at 9:30 p.m.

 

Must Reads

A Nike store in Manhattan remained closed Tuesday in an effort to contain the spread of coronavirus. PHOTO: CARLO ALLEGRI/REUTERS

The appetite for blue-chip corporate bonds is improving amid market stress. Business giants including Nike, McDonald’s and Pfizer were among those that sold bonds Wednesday, following in the footsteps of Comcast and Mastercard a day earlier.

Corporate insiders are betting on a rebound in stocks. Corporate insiders are buying stock in their own companies at a pace not seen in years, a sign they are betting on a rebound after a coronavirus-induced rout.

The coronavirus shows cash is king, even for the biggest U.S. companies. Even the largest firms are cutting their spending and bolstering their balance sheets, proving the importance of cash once again, especially in times of crisis.

Against the coronavirus, the Federal Reserve’s banking stress test doesn’t look so bad. Bankers wonder if regulatory exams are even worth it this year as coronavirus decimates the economy.

William Ackman had a big win on a bearish market bet. Mr. Ackman’s Pershing Square just scored big on a bearish bet that enabled him to sidestep steep market losses.

The coronavirus stimulus package will include curbs on share buybacks. Congressional leaders have agreed to impose limits on stock buybacks and dividend payments for airlines and other companies receiving aid under the coronavirus-stimulus package.

SoftBank dumped Moody’s after a two-notch downgrade. The credit rating firm gave a thumbs down to SoftBank’s plan to repurchase up to $41 billion in shares and debt, by lowering the Japanese technology giant’s credit rating and questioning the “unexpected size and apparent urgency” of the move.

Some hedge funds cashed in when oil prices cratered. A common theme among the winners: hanging on to bearish bets even though markets had already moved down massively.

Investors are warming to natural gas. Traders are backing off their bearish bets on natural-gas prices, stock buyers are flocking to the beaten-down shares of Appalachian producers and analysts are forecasting short supplies of the fuel next year unless those companies get back to drilling.

 

What We’ve Heard on the Street

“Even if there are no major financial icebergs lurking beneath the surface—by no means guaranteed—markets still appear too sanguine on the real shock to the U.S. economy.”

 

Stocks to Watch

Target: The retailer’s sales of food and household goods are surging because of the coronavirus pandemic, but it may report lower-than-expected profits as demand falls for high-margin goods and it becomes more expensive to clean and staff stores.

Groupon: The Chicago-based company that connects consumers with local merchants said its chief executive and chief operating officer have relinquished their roles, effective immediately.

 

About Us

We want to be the first place you go to get ready for the opening bell every day. This newsletter is written and edited by James Willhite (@jimwillhite; james.willhite@wsj.com) in London.

 

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