U.S. policy responses to the COVID-19 pandemic remain a lightning rod for debate, but there is little ambiguity regarding the effectiveness, implicit or otherwise, of the liquidity backstops the Federal Reserve erected two months ago to stabilize the corporate bond markets.
The tidal wave of investment-grade, or IG, bond issuance — deals rated BBB–/Baa3 or higher — since the Fed announced those facilities has swept away prior records and continues apace in May.
The Fed started the boom with its March 17 announcement of the Primary Dealer Credit Facility, or PDCF, and on March 23 it rolled out the Primary Market Corporate Credit Facility, or PMCCF, and Secondary Market Corporate Credit Facility, or SMCCF. The PMCCF and SMCCF — the former designed to provide direct lending to liquidity-strapped IG companies, and the latter to buy IG bonds and ETFs on the open market to shore up prices and liquidity — were expanded in April to extend the safety net to "fallen angel" issuers hit with downgrades to the double-B rating category after March 22.
From March 17 to May 19, IG issuance exploded to a staggering $675 billion cumulative total, according to LCD. That's about $100 billion more, in roughly two months, than issuers placed over the entirety of the first six months of 2019. The surge provided broad liquidity support, across 348 announced transactions and 640 separate tranches, as many issuers tapped multiple tenors on the yield curve thanks to strong investor demand. The vast majority of proceeds back general balance-sheet liquidity and/or the refinancing of bank-facility draws and upcoming debt maturities.
Total volume so far in the second quarter, at $450 billion, is on pace to blow past the $471 billion of bonds printed in the first quarter this year, also a record amount. The $921 billion of year-to-date issuance is more than 97% ahead of the 2019 pace, and already represents nearly three-quarters of the full-year record amount of $1.24 trillion, recorded in 2017. Overall monthly totals of $276 billion in April ($258 billion from non-financial issuers) and $261 billion in March ($242 billion non-financial) are the highest totals for any calendar-month periods since LCD started tracking the asset class in 2013. May volume, at $174 billion through May 19 ($147 billion non-financial), was already in third place, moving above the pre-coronavirus peak level of $171 billion in January 2017 ($140 billion non-financial), when issuers swarmed the marketplace to refinance debt following the 2016 U.S. elections.
The U.S. Treasury Department guaranteed a $75 billion equity investment to seed the special purpose vehicle charged with lending and buying under the alphabet soup of programs rolled out on March 23, and the Fed backed as much as 10x leverage for that investment. However, in recent Congressional testimony, Treasury Secretary Steven Mnuchin touted the effectiveness of the lending program "without putting up $1 of taxpayer money."
In the meantime, the spread level for the S&P U.S. Investment Grade Corporate Bond Index had ebbed to 197 bps over Treasurys as of May 19, from a coronavirus-era peak at 366 bps. Any headway on spreads also reflects mostly implicit support from the Fed, which had tallied a marginal $305 million of portfolio holdings under the corporate bond-buying facility as of May 13.
Mnuchin prominently cited Boeing Co. as among the liquidity-challenged issuers he had expected to tap the liquidity facilities, but which instead found the corporate markets "unlocked" under the implicit promise of federal support. Boeing on April 30 placed $25 billion of notes into voracious demand, marking the largest transaction yet under the shadow of the pandemic.
While some challenged issuers are paying high prices on the primary market to lock in funds (Royal Caribbean Cruises Ltd. offered 10/11% handles to clear $3.32 billion of IG-rated secured notes on May 13), many well-heeled borrowers have locked in their lowest-ever funding costs against bone-thin underlying Treasury yields. Costco, with new 1.6% 10-year notes, and Eli Lilly, with a 2.25% 30-year issue, in April set unprecedented low rates at those tenors.
This analysis was written by John Atkins, who oversees U.S. bond market coverage for LCD.