NEW YORK, Nov 18 (Reuters) - Investors searching for yield are driving a flood of new U.S. corporate debt to market this week, with investment-grade issuers from Saudi Aramco to Volkswagen selling $26.3 billion on Tuesday, the highest daily volume recorded since May.
With interest rates near zero in many of the world’s largest economies, fixed-income investors have sought the higher payouts available in corporate debt markets. The premium investors demand to hold riskier corporate bonds over Treasuries narrowed this week to near pre-pandemic lows.
That was most notable in the riskiest credit: Markit’s high-yield index of credit default swaps rose in price to 107.97%, approaching its highest levels since February. A higher price on the CDX index indicates investors are buying the contract, betting on credit amelioration.
Investors’ demand for yield and backing from the Federal Reserve have allowed companies to keep borrowing funds to stay afloat, even as a coronavirus resurgence threatens the fragile U.S. recovery and the timing of a fiscal stimulus package from lawmakers is unclear.
“Access to capital is as available as we’ve ever seen it,” said John McClain, portfolio manager at Diamond Hill Capital Management.
“Fundamentals don’t matter.”
Strong investor demand has allowed companies from even the most distressed sectors to raise cash. Bonds from hotel chain Hilton and real estate investment trust MGM Growth Properties - linked to casino operator MGM Resorts - have been sold in the high-yield market this week. And two cruise lines - Carnival and Norwegian - are tapping equity capital markets today.
That situation could change if corporate defaults and downgrades pick up dramatically. But that may not be likely unless Fed policy changes.
“For 2021, interest rates are going to stay low and people want real yields, so they’re going out the curve and going out the credit spectrum,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. (Reporting by Kate Duguid; Editing by David Gregorio)