It’s been touch-and-go for U.S. companies looking to borrow in one of the world’s deepest financial wells in the six days since Russia launched its military assault on Ukraine.
The attack on Ukraine sparked international backlash, a wave of new sanctions designed to punish Moscow and some of its largest banks, companies and most powerful families, by cutting them off from Western markets.
The war also has fueled market turmoil, with oil prices topping $100 a barrel and investors piling into gold, U.S. Treasurys and other traditional haven assets as Europe faces its biggest test since World War II. Until Tuesday, it also meant a pause on U.S. corporate bond issuance.
“While there were no deals Thursday, Friday or Monday, there are six deals today,” said Tom Murphy, head of investment grade credit at Columbia Threadneedle Investments, of the U.S. investment-grade segment of the corporate bond market.
Murphy also said that “probably another six issuers stood down,” meaning they opted not to bring new deals yet, with market conditions remaining volatile as Ukraine’s capital of Kyiv braced for an all-out assault.
U.S. stocks tumbled Tuesday, with the Dow Jones Industrial Average
down about 600 points, or 1.8%, according to FactSet. Benchmark 10-year Treasury
rates plunged to around 1.7%, marking the biggest two-day drop since March 2020.
Capital One Financial Corp.
was among the handful of companies back in the market Tuesday, with a new, $2.5 billion BBB-rated investment-grade bond deal that priced at a roughly 2.6% rate, according to a person with direct knowledge of the dealings.
The high-yield, or “junk-bond,” market, has remained quiet too, with only consumer goods company BellRing Brands, Inc.
coming to market on Tuesday with a roughly $840 million bond deal in the 7% rate range, since Twitter Inc.’s
$1 billion financing on Feb. 23, according to Informa Global Markets.
Credit spreads and the Fed
Credit spreads, an indication of borrowing conditions for U.S. companies, were among the key gauges used by the Federal Reserve to calibrate highly accommodative monetary policies at the onset of the pandemic, including for the first time in history a brief foray into buying corporate debt.
Spread levels on corporate bonds have widened in recent months, giving investors a shot to earn higher “premiums” above the risk-free Treasury rate, but also making it more challenging for borrowers.
Investors pegged investment-grade bond spreads moving closer to 130 basis points above Treasurys on Tuesday, but still below the roughly 135-basis-point average in the post-2008 financial-crisis period.
“The new-issue market is still open,” said David Del Vecchio, co-head of the U.S. investment-grade corporate bond team at PGIM Fixed Income, by phone. “It’s not necessarily open every day, but the fact that issuance is able to get done means the Fed doesn’t need to worry, yet.”
Importantly, investors told MarketWatch it likely would take another 50 basis points to 75 basis points of widening, or more, to get the Federal Reserve’s attention.
“I don’t think we are anywhere near those levels, when they would step back in the market again,” Del Vecchio said.
Also, with 10-year Treasury yields falling, all-in costs for investment-grade corporate borrowers remain below 3% for most companies, said Nicholas Elfner, Breckinridge Capital Advisors, co-head of research, in a phone call.
“For most investment-grade companies, that’s still a low cost of debt capital,” he said. “Certainly, if you start to see spreads widening sharply, I think that would be sometime that would generate attention at the Fed.”
Investors Wednesday will be tuning in to congressional testimony from Fed Chair Jerome Powell on the economy, putting a priority on any updates on how the Ukraine crisis might be impacting the central bank’s thinking on fighting inflation by moving away from two years of ultra-easy monetary policy.
Before Russia’s attack, Powell and other Fed officials said they may increase policy rates at their mid-March meeting for the first time since 2018, and thereafter start shrinking the central bank’s nearly $9 trillion balance sheet.
“It’s hard to handicap how the Russia and Ukraine situation might escalate,” said Travis King, head of U.S. investment-grade credit at Voya Investment Management, or if sanctions and higher oil prices exacerbate existing inflation pressures.
“The Fed doesn’t want to slow things down too much, but it can’t really pivot away from at least talking tough, and signaling it is being vigilant about inflation,” he said.