The corporate debt market is still doing its part to keep America out of a recession.
These aren’t amazing numbers for this time of year — they’re slightly below the November average for the previous five seasons — but they’re not bad, either. Inasmuch as issuance is falling, it’s almost entirely because companies don’t want to borrow at these interest rates, not because the market isn’t open to them. The market still hasn’t seen anything that looks like the feared “buyers’ strike,” which can leave companies high and dry in their moments of need. Even issuers in the high-yield market — which has been in a deep freeze — could probably borrow if they so desired. They just don’t want to at 8.5%, and most had the foresight to load up on funding when rates were low in 2021.
In that sense, the corporate bond market feels a lot like the US retail sector and job market, two corners of the real economy that have proved surprisingly and persistently resilient in the face of ever-present doomsday predictions. Corporate balance sheets, like household bank accounts, may be deteriorating a bit from their pristine early 2022 levels, but both started from places of extraordinary strength. All of these things can help delay, if not necessarily prevent, a recession. The resilience can’t endure forever with the Federal Reserve set to push interest rates to the highest levels since 2007, but there’s a chance — perhaps small, some would say — that it can persist just long enough to keep a soft landing for the economy within the realm of possibility.
In a market that’s been starved for yield for the better part of the past decade, and with pervasive uncertainty around the outlook for equities, many investors look downright eager to own corporate bonds. In its weekly commentary Monday, BlackRock Investment Institute analysts including Global Chief Investment Strategist Wei Lu said they remain tactically and strategically overweight investment grade credit on “attractive valuations and income potential.” In a nutshell, you’d need things to go south drastically from here — credit quality would have to deteriorate meaningfully or inflation would have to prove much more stubborn than expected — to lose money on US investment-grade bonds, which were fetching 5.31% at the time of writing.As my Bloomberg Intelligence colleague Noel Hebert put it, all-in yields would have to climb an additional 75 basis points or so just to wash out coupon income. What are the odds of that?
• Option-adjusted spreads on high-grade debt stand at 133 basis points, and Hebert wouldn’t expect them to exceed 225 to 250 basis points even in the event of a recession, implying a maximum deterioration of around 117 basis points.
• Meanwhile, the median expectation among strategists surveyed by Bloomberg is for 10-year Treasury yields to end 2023 down slightly from current levels; the range of projections is from 2% to 5.4%.
• These estimates could both prove to be wrong individually, but they’re unlikely to be wrong at the same time in the same direction, and they would tend to cancel each other out, 1970s-style stagflation notwithstanding.
There’s even appetite for some of the riskier parts of the corporate market. Apollo Global Management Inc. just raised a $2.4 billion fund to buy debt with double-digit yields, private financings and some structured credit. Armen Panossian, Oaktree Capital Management’s head of performing credit, told Bloomberg TV on Monday that “higher quality high-yield bonds offer attractive opportunities,” as do some parts of the private credit market.
If anything, investors look a little too eager to pay up for corporate credit heading into an uncertain 2023, judging from the current level of spreads. But there’s reason for hope if investors stay as optimistic as they apparently are. Recessions are ultimately crises of confidence. Consumers lose confidence and stop buying goods and services, so employers cut costs by laying off workers, who then purchase even less. Similarly, investors often lose the confidence needed to fund companies at a reasonable price, so companies invest less in the sorts of projects that fuel growth. In that sense, the current vote of confidence from bond markets may prove to be a self-fulfilling prophecy if the open market helps keep the dream of a soft landing alive.
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Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company’s Miami bureau chief. He is a CFA charterholder.
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