Markets were negative as news of rising COVID-19 cases contributed to fears of reinstated lockdown measures, specifically for those states that were first to open. The Dow and S&P 500 lost 3.3% and 2.9%, respectively, this week. The spreading cases around the country had investors shifting to a more pessimistic outlook that has not been seen in recent weeks.
Financials continue to underperform the market after the Fed's banking sector stress test results restricted dividends and share buybacks due to capital requirements. Additionally, consumer spending rebounded less than expected for May and June consumer sentiment was revised downward. This was exacerbated by weak earnings from Nike, while Gap offered a strong surge after an announced partnership with Kanye West. Treasury yields were lower as bond prices rose modestly, with the 10-year Treasury Note closing at 0.64% (vs. 0.68% on 06/19) and the 1-month Treasury Bill closing at 0.11% (vs. 0.14% on 06/19). The U.S. dollar was little changed, while crude oil prices were modestly lower and gold was higher. Europe relinquished early gains and finished mostly lower, while markets in Asia were largely higher.
Investors both domestically and abroad continue to have strong demand for yield. Issuers from municipals to high yield corporates are leveraging their balance sheets, while revenues are shrinking. This is leading to many investors questioning the long-term credit quality in bonds. Expectations are for a spike in defaults on bonds issued in 2020, which was funded by loose monetary policy and an insatiable demand for yield from investors.
CDX IG and iTraxx Europe spreads ticked upwards as concerns related to COVID-19 continue to weigh on market sentiment, as investment grade spreads widened to 189bps amidst concerns of renewed containment measures. High grade issuance volume totaled ~$68bn last week, driven by financials and healthcare. Issuers continue to return for subsequent rounds, resulting in multiple issuances across compressed timeframes, including:
Wells Fargo issued $6.0bn on 5/26, $6.5bn on 4/23, and $6.0bn on 3/23
Citigroup issued $3.5bn on 5/26 and $1.5bn on 5/07
Issuers are locking in liquidity at higher spreads than previously recorded for comparable issuances, albeit generally at tighter coupons due to lower base rates.
UnitedHealth Group secured its lowest-ever long-term funding costs:
May-20 ($5.0bn across five tranches): 10-year $1.25bn senior notes; Spread: 145 bps; Coupon: 2.000%
July-19 ($5.5bn across five tranches): 10-year $1.00bn senior notes; Spread: 80 bps; Coupon: 2.875%
Apple Inc. secured its lowest absolute borrowing costs on record:
May-20 ($8.5bn across four tranches): 10-year $1.75bn senior notes; Spread: 110 bps; Coupon: 1.65%
Sep-19 ($7.0bn across five tranches): 10-year $1.75bn senior notes; Spread: 78 bps; Coupon: 2.20%
PepsiCo secured its lowest absolute borrowing costs on record:
Mar-20 ($6.5bn across six tranches): 10-year $1.5bn senior unsecured notes; Spread: 180 bps; Coupon: 2.75%
Oct-17 ($4.0bn across three tranches): 10-year $1.5bn senior unsecured notes; Spread: 68 bps; Coupon: 3.00%
High yield markets continue to see an uptick in new issuances, taking YTD volumes to ~$215bn, up ~64% year-over-year. Total YTD returns for the index are at -3.8%. MTD volume has already exceeded the full-month record across all months, including the previous record set in September 2013 ($48bn).
Highlights from last week issuances include:
American Airlines issued $2.5bn of 5-year senior secured notes at 99 with a coupon of 11.75%
Minerals Technologies issued $400mm of 8-year senior notes at par with a coupon of 5.00%
The market will still have plenty to consume on this holiday week. The most important economic indicators have been stats released around COVID, but we will still see a reports around housing and employment this week. ADP employment, nonfarm payrolls, and the unemployment rate will all be released on the second half of the week. The FOMC minutes will also be released on Wednesday, where investors will go through the rhetoric to predict future stimulus.
Happy 4th of July!
US Barclays Agg +6.14%, 1.27% yield, -175 bps excess return
US Barclays Corp +4.91%, 2.17% yield, -572 bps excess return
UST 10yr 0.65% yield, -127 bps
S&P 500 3,009, -6.86%
DJIA 25,015, -12.34%
OIL (WTI) $38.16, -37.66%
Gold 1,784, +17.42%
We saw the continuation of higher yields this week as inflation concerns, positive vaccine news, and a faster recovery remain at the forefront of fixed income markets.
The flash move for Treasuries this week shows the jitters of fixed income investors, worried of the impact of stimulus and potential inflation.