Corporate bond and loan prices rallied on Monday after a breakthrough in the race for a Covid-19 vaccine fed hopes that a battered corporate sector will be able to go on paying its debts.
Credit markets had already been soothed last week as it became clear that Joe Biden would win the US presidential election and investors shrugged off doubts over whether a reshuffled Congress would be able to provide a second big fiscal stimulus. The rally gained another tailwind on Monday after Pfizer and BioNTech announced that their Covid-19 vaccine is more than 90 per cent effective.
A widely watched high-yield bond exchange traded fund — known by its ticker HYG — jumped 1.3 per cent in morning trading in New York. That put the “junk bond” fund on course for its biggest one-day gain since May, following the best week since early June.
Andrew Brenner, head of international fixed income at National Alliance Securities, said the potential drug approval is a “prelude to the reopening of the US economy”.
“It means companies will start hiring again, people will start spending again and companies like airlines, restaurants and cruise lines will start doing much better,” he said.
Embattled US companies rushed to issue debt when coronavirus struck earlier this year, eager to secure cash to help them outlast the pandemic. With the possibility of a vaccine being approved, the chance of precarious companies surviving — and repaying their debts — has increased, investors say.
As its share price shot up more than 10 per cent on the vaccine news, American Airlines’ $2.5bn bond maturing in 2025 soared to over 106 cents on the dollar. The debt had traded as low as 86 cents on the dollar in July, shortly after it was issued in June. Meanwhile, a Delta Air Lines bond maturing in 2028 — and backed by its Skymiles rewards programme — jumped to more than 105 cents on the dollar.
Traders said conservatively positioned investors had last week begun unwinding hedges put in place to protect against election risks, as it became clear that their worst fear — a closely contested election and civil unrest — had not materialised.
The cost of protecting against corporate default, reflected in a commonly used index of credit default swaps, fell last week as investors unwound their hedges. On Monday, it moved to its lowest level since the end of February — before the coronavirus sell-off gathered pace.
John Cortese, co-head of US credit trading at Barclays, said there was “general relief in the market” that any extreme outcome to the presidential race had been taken off the table. “We have seen a meaningful reduction of hedges,” he said.
Some investors also called for caution. Even with the possibility of a vaccine, the winter months threaten an uptick in coronavirus cases in the US and the potential for a more stringent policy response from a Biden administration that could suppress economic activity further.
S&P Global noted on Friday that the number of corporate defaults globally had reached 200 for the first time since 2009, while the amount debt investors are recouping through bankruptcy is at a historic low.
“We still have a not insignificant default rate, low recovery rates and the prospect of that continuing,” said Fraser Lundie, head of credit at asset manager Federated Hermes.