By Tasos Vossos and Davide Barbuscia
Credit investors are loading up on riskier debt, betting that Iran and the US can extend their truce, and leaving behind havens they’ve favoured since the war broke out in late February.
In the first half of April, investors bought a net $500 million of bonds in the lowest tier of investment grade, and sold $7.3 billion of the higher tiers, according to JPMorgan Chase & Co. That helped BBB bonds perform comparatively better than higher-rated notes, pushing the gap between spreads for BBB and A corporates to the tightest since before the war.
There may be good reason for these slightly riskier bonds to be performing better: BBB rated companies have outperformed analysts’ average forecasts more than A companies have, according to a Bloomberg News analysis. Buyers are hoping a more lasting peace in the Middle East can be forged by negotiators, and that companies in the lower edges of investment grade can keep performing well.
“There is some value in the BBB space and issuers there have been good stewards of the balance sheet and generally improving credit quality,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments.
Investors have also been snatching up junk bonds, although with a preference for the higher-rated end of the spectrum, implying that money managers still see risk ahead even as they grow moderately more hopeful. Overall spreads for junk bonds are at their tightest since the war began, averaging 2.72 per cent as of Thursday’s close.
On Thursday, cloud infrastructure provider CoreWeave Inc. tapped the US junk-bond market for the second time in just a week, selling $1 billion of additional debt following the successful raise of $1.75 billion. High-yield bonds posted a $2.8 billion inflow this week, the largest amount recorded since June of last year, according to LSEG Lipper.
In the high-grade market, first-quarter results so far bolster the view that companies have withstood the energy shock. Among the first 100 companies to report, those rated within the BBB band by S&P Global have outperformed analysts’ average earnings expectations by 9.3 per cent, based on data compiled by Bloomberg News. The number for firms rated A or above is 6.2 per cent.
Corporate earnings expectations have continued to rise despite the conflict, with lower-rated firms delivering early earnings beats and renewing optimism over artificial intelligence.
To be sure, bets on BBB issuers are becoming crowded, with their spread to A peers in the US at the lowest since before the war.
“We view BBBs as rich,” said Tony Trzcinka, an investment grade portfolio manager at Impax Asset Management.
Energy firms account for about 10 per cent of Bloomberg’s BBB corporate index, but just 3 per cent of A rated peers. That also helps explain some of the outperformance for the former.
AI Binge
Issuers whose debt has ballooned are also stirring concern. Notably, BBB rated Oracle Corp. has taken out $120 billion of bonds for a debt-fueled and still unproven wager on AI, and become the biggest borrower in the Bloomberg US high-grade corporate bond index, outside of banks.
Tannuzzo is wary of companies rapidly increasing leverage to finance AI projects, and sees value in utilities, energy and telecommunications firms.
Likewise, Jon Curran, head of investment grade credit for Principal Asset Management, is looking for companies that are deleveraging and issuers with strong balance sheets and industry positions.
Meanwhile, negotiations to end the war are ongoing, with some Gulf Arab and European leaders warning a peace deal would take about six months to be agreed, though President Donald Trump said he’d won key concessions. On Friday, Iran said it would open the Strait of Hormuz for the duration of a 10-day ceasefire between Israel and Hezbollah in Lebanon, increasing the prospect of a wider peace deal.
These hopeful signs are enough to unleash buyers in both secondary and primary credit markets. Borrowers in the high-grade US market sold nearly $58 billion in bonds this week, led by banks, more than 40 per cent above expected issuance. In Europe, banks and insurers raised the largest amount from junior-ranked bonds since before the war.
“Demand has kept pace with elevated issuance, with the market absorbing supply in an orderly way,” Curran said.
