Corporate bonds

A flatter yield curve is bad news for corporate bonds, says BofA

(Bloomberg) — Inflation fears that have rattled short- and medium-term U.S. Treasuries this month could spell trouble for credit markets, Bank of America Corp strategists say.

Concerns about rising inflation narrowed the spread between short-term and long-term Treasury yields. This kind of yield curve flattening has historically hurt investment-grade corporate bond yields, strategists wrote in a report this week that does the direct opposite that JPMorgan Chase & Co. did this week.

BofA expects risk premiums to increase significantly for intermediate maturities and expects spreads to widen overall. The average spread on the Bloomberg US Corporate Investment Grade Index stood at 85 basis points at Tuesday’s close, close to the narrowest level of the year of 80 basis points in June.

A flatter yield curve gives investors relatively less compensation for buying longer-term bonds like high-quality corporate debt instead of short- or medium-term notes, Bank of America said. A less steep curve also tends to raise hedging costs for foreign investors, reducing their demand for U.S. corporate debt, the strategists wrote. These costs have already started to increase for investors based on the euro and the yen.

The difference between 5-year and 30-year Treasury yields reached around 85 basis points this week, the narrowest since April 2020. It has since widened slightly to 96 basis points, but the curve is still significantly flatter than its May level of 157 basis points.

JPMorgan Chase & Co., meanwhile, expects high-quality bond spreads to “tighten slightly” by the end of the year.

“The slowdown in earnings and GDP growth due to supply disruptions reflects strong demand (a positive) and is not negative for credit spreads as demand will be delayed in most cases rather than reduced,” wrote the strategists led by Eric Beinstein.

Elsewhere in credit markets:

Americas

Three investment-grade U.S. deals are on the market Wednesday: Bank of New York Mellon, Norilsk Nickel and Taiwan Semiconductor Manufacturing Co.

  • In the high-yield sector, insurance broker Alliant Holdings is set to price a $925 million multi-part bond sale as primary debt markets remain hot
  • Commitments on at least four U.S. leveraged loan sales are expected on Wednesday, including network-attached storage firm Anthology’s $1.8 billion deal that backs its acquisition of the tech company blackboard education
  • Commitments for the UFC mixed martial arts promoter’s $600 million loan are also due. The loan will fund a distribution to its parent company for general corporate purposes
  • Carnival Corp. sold a junk bond on Tuesday that was raised to $2 billion, just over a week after the energy-guzzling cruise line increased the size of a leveraged loan deal that helped the company reduce borrowing costs.
  • Puerto Rico’s House of Representatives on Tuesday night approved a bill that allows the Commonwealth to issue new bonds to replace existing debt and reduce its obligations, a key step that brings the island closer to resolving its record-breaking bankruptcy.
  • For deals updates, click here for the New Issue Monitor
  • To learn more, click here for Credit Daybook Americas

Europe

A total of 16 deals were sold in the primary market on Wednesday, including Italy’s €5 billion ($5.82 billion) green bond.

  • According to Robert Holzmann, a member of the Governing Council of the European Central Bank, investors looking for yield in an era of low interest rates risk triggering a financial crisis.
  • At least four new mandates have been announced, including carbon-neutral-themed multi-currency bonds from the Industrial and Commercial Bank of China Ltd.

Asia

China slashed borrowing costs on a $4 billion bond sale, a sign that concerns have waned over the risks of contagion from a debt crisis at a major developer.

  • The Ministry of Finance has priced the four-part note offering at yield premiums over Treasury bills below initial marketing guidance
  • Lotte Corp., a holding company of the Lotte Group, plans to sell yen-denominated notes as well as dollar bonds to help refinance its maturing debt. If issued as planned, the yen note will be the first Samurai bond sold by a South Korean issuer since 2019

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