By Matt Wirz, Paul J. Davies and Sam Goldfarb 

High-yield bonds are weathering the coronavirus scare better than stocks, underscoring the stark difference in investor expectations that has prevailed for those markets in recent months.

The prices of many sub-investment-grade bonds rose Tuesday, with the price of Kraft Heinz Co.'s bonds due in 2046 jumping about 4%, according to data from MarketAxess. The Dow Jones industrials fell 785.91 points, or 2.9%, on Tuesday, while the S&P 500 dropped 86.86 points, or 2.8%, in its eighth decline in nine trading sessions.

The S&P 500 has now dropped 11% since its Feb. 19 record closing high, while the SPDR Bloomberg Barclays High Yield Bond exchange-traded fund has declined 2.8% since then. For the year, the S&P 500 is down 7%, and the SPDR Bloomberg Barclays ETF, known in the market by its ticker symbol, JNK, is down 2.3%.

Though junk-bond issuance remains slow, a few companies are pushing forward. Cleveland-Cliffs Inc., an iron-ore miner, issued $725 million of new secured bonds Monday, and Science Applications International Corp. said Tuesday it would try to sell $400 million of bonds due in 2028.

The relative stability of below-investment-grade bonds comes after widespread warnings last year about dangers lurking in corporate debt. While investors continue to look at developments in the bond market, many of them say that junk bonds have continued to be priced conservatively compared with stocks, which have spent much of the past five years in valuation territory that makes many buyers uncomfortable.

"One of the reasons we think credit is performing well compared to stocks is that stocks have been really expensive and pricing in double-digit earnings growth this year," said Will Smith, a high-yield portfolio manager at AllianceBernstein.

Rising Treasury bond prices have also given some ballast to the junk-debt market. The 10-year U.S. Treasury yield fell Tuesday below 1% intraday for the first time ever before ending the day at 1.005%, an all-time closing low. Lower bond yields mean higher prices.

The larger the spread between the yield on junk debt and Treasurys, the more attractive below-investment-grade debt becomes as an alternative to investors.

"If you're looking at how to generate income in a portfolio when the 10-year yields below 1%, high yield with spreads approaching 5.50 [percentage points] starts to look much more attractive," said Robert Hoffman, head of research for the money manager FS Investments.

Fallout from the coronavirus epidemic has weighed heavily on the bonds of such firms as the tourism group TUI AG and the energy company Chesapeake Energy Corp. Average yields increased in the junk debt market to 6.06% on March 2 from about 5% in mid-February, according to Bloomberg Barclays Indices data.

Even so, yields are well below levels reached during the selloff at the end of 2018, when traders and analysts grappled with fears that the U.S. was headed for recession. Back then the yields on the Bloomberg Barclays U.S. High Yield Index hit a high of 8.12%.

The market for leveraged loans -- junk-rated debt that is typically used to fund private-equity deals -- has also experienced declines, but not as severe as at the end of 2018, according to data from S&P Global Market Intelligence's LCD loan-research service. The price of the corporate loans of Uber Technologies Inc. has dropped about 1% since mid-February, according to Analytics Data Inc., compared with a roughly 17% drop in the ride-hailing company's stock.

The extreme tumult in the stock market is making bonds look relatively safe.

"If you invested in equities, you were up 30% last year, but now you're down 15% in a week," said Craig Russ, a loan-portfolio manager at Eaton Vance. "That's why you have fixed income in your portfolio, to dampen the volatility in equities."

The problem for investors in riskier bonds now centers on uncertainty about how severe the economic effect of the coronavirus epidemic will be and how individual investors will react. Heavy outflows hit mutual funds that invest in high-yield bonds and loans last week, and although the pace abated in recent days, it could accelerate again on news of more outbreaks, fund managers said.

Some wonder if the junk-bond market isn't the one that is now looking too optimistic.

"Equity markets are pricing in a good probability of a mild recession, but the credit market isn't," said Alberto Gallo, head of macro strategies at the London-based fund manager Algebris. "Central bank action will probably cut the recession [risk] so we don't get a lot of defaults, but we also know that quantitative easing doesn't lift all boats."

Even so, some see a buying opportunity in junk bonds as prices fall from these levels.

Mark Benbow, investment manager for high yield at Kames Capital, is looking to pick up bonds from companies he likes such as the supercar maker McLaren, which he says should be less susceptible to economic-slowdown fears than other car makers and has a strong order book.

Others say picking spots in markets can help mitigate risk.

"We know there is a demand shock coming; we just don't know how big it is going to be," said Maya Bhandari, multiasset-portfolio manager at Columbia Threadneedle. "We've seen credit spreads widen quite meaningfully and a bit more value and opportunity opening up in high yield. But there is some vulnerability too, particularly in U.S. energy, while autos and auto parts have been hit."

Write to Matt Wirz at matthieu.wirz@wsj.com, Paul J. Davies at paul.davies@wsj.com and Sam Goldfarb at sam.goldfarb@wsj.com

 

(END) Dow Jones Newswires

March 04, 2020 08:14 ET (13:14 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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