Borrowing costs

Borrowing costs fall for even riskier companies

Diving Brief:

  • Companies with less than stellar credit ratings are benefiting from cheap borrowing rates thanks to investors’ growing appetite for risk and continued pandemic-related credit downgrades from some large-cap companies.
  • The spread between junk corporate bonds and Treasuries in the Bloomberg Barclays US High Yield Corporate Bond Index has narrowed since late last year and last week stood at 2, 75 percentage points, up slightly from 2.62 percentage points. the lowest since before the 2007 financial crisis, The Wall Street Journal reported.
  • The narrow spread suggests that investors are willing to accept a lower yield, relative to Treasuries, to hold corporate bonds with credit ratings below investment grade.

Overview of the dive:

One of the reasons for the risk appetite is the low yield of Treasuries, which forces investors to buy speculative assets to earn higher returns. The yield on 10-year Treasury bills last week was 1.29%, the Journal reported using data from Tradeweb. That’s down from 1.365% earlier in the week.

Another reason is continued investor confidence in the economy, despite the rise of the Delta COVID-19 variant and the possibility of interest rate tightening by the Federal Reserve to calm inflation, the Journal reported. .

Safer businesses

But another reason has to do with the quality of the companies whose bonds increasingly constitute high-risk indices; Due to the impact of the pandemic last year, a growing number of branded large-cap companies like Ford and Kraft Heinz lost their investment-grade credit ratings, pushing their bonds into high-risk indexes.

“For a while, high yield has increasingly become the domain of large caps [companies], which are often higher quality companies or at least higher rated companies,” Michael Anderson, head of US credit strategy at Citigroup Inc., told the Journal.

Nearly 55% of bonds in the ICE BofA US high-yield index have an average credit rating of double B, the Journal reported. This is an increase from 47% in 2019, before the pandemic, and 38% in 2008, before the financial crisis.

Double-B is the highest credit rating below investment grade, meaning an increasing percentage of high-risk indices are weighted by assets that are safer or at least perceived to be safer.