Company Debt With a Long Maturity Jumped the Most Since 2008

(Bloomberg) — Credit investors are piling back into debt with long maturities hoping that the Federal Reserve will soon slow its pace of tightening.

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US corporate debt due in 10 years or more has surged 9.5% so far this month, on track for its biggest leap since December 2008. The bonds have plunged more than 24% in 2022 given their high duration, which causes prices to drop as rates rise.

“With the sharp rise in interest rates, the long end of the [investment-grade] corporate bond market was the hardest hit during 2022,” said Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, in a emailed response to questions. “Today we see opportunities to invest in unusually low-dollar-priced bonds of high-quality companies.”

Money managers are betting Fed Chair Jerome Powell will this week signal a slower pace of interest-rates increases. That’s boosting appetite for long-dated corporate debt trading at the lowest price on record, including bonds from household names like Amazon and Verizon Communications Inc.

This month’s move is more than just the corporate-debt market reflecting a broad rally in Treasuries, the benchmark for borrowing costs in the US. Blue-chip company bonds with a maturity of 10 years or more have returned about 2.4 percentage points more than equivalent Treasuries since Oct. 31.

Credit buyers are getting more confident that the Fed is in sight of an ultimate terminal rate and US economic data are showing signs of stability, CreditSights Inc. strategists led by Winnie Cisar wrote in a report dated Nov. 21.

“Investors have started to redeploy capital in longer-duration asset classes,” they wrote.

A slowdown in the pace of Fed rate hikes makes higher-quality corporate bonds look more attractive, according to Steven Boothe, head of the investment-grade fixed income team at T. Rowe Price Group Inc.

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“Relative to lower-rated credit sectors, the asset class offers compelling relative valuations given current dollar prices,” Boothe said in a telephone interview.

Barry McAlinden, senior fixed income strategist for the Americas at UBS Financial Services, said that the value proposition in long-term bonds comes from a high absolute total return potential if long-end rates have actually peaked.

“With a year-ahead view that [investment-grade] bond yields will be lower in 2023, higher-duration bonds would outperform,” he said in an emailed response to questions.

Rate Risk

Not everyone is convinced it’s time to buy as the Fed continues to wrestle with historically high inflation. Over-tightening could create a double whammy of duration pressure and economic slowdown that slams earnings and heightens downgrade risk.

Read more: T. Rowe Price Sees Credit Threat From Too Much Fed Tightening

There’s still significant uncertainty around the path of consumer prices and the economy. That could impact valuations over the short term, said Terence Wheat, managing director of investment-grade corporate bonds at PGIM Fixed Income.

“Risks to long-duration credit next year would include inflation staying elevated and the Fed having to raise rates more than the current view,” said Travis King, head of US investment grade corporates at Voya Investment Management, in an emailed response to questions.

Earlier this month St. Louis Fed President James Bullard said there’s still more work to do to rein in inflation. The bank’s key benchmark rate should be raised to at least 5% to 5.25%, from 3.75% to 4% now, he said. Federal Reserve Bank of Cleveland President Loretta Mester reiterated last week that officials are focused on taming price increases.

Elsewhere in credit markets:

Americas

BlockFi Inc. filed for bankruptcy. It will use the Chapter 11 process to “focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities,” adding that recoveries are likely to be delayed by FTX’s own bankruptcy.

• Global collateralized loan obligation prices are rallying from a short-lived, UK-centered selloff that’s changing investor perceptions about the market

• Corporate borrowers will consider tapping bond and loan markets in the coming week as lending costs drop and investors snap up debt ahead of 2022’s close

• NGL Energy Partners LP is seeing its liquidity tighten just as some of its largest debt approaches its due date in the next 12 months

• For deal updates, click here for the New Issue Monitor

• For more, click here for the Credit Daybook Americas

EMEA

BlackRock Inc., Pacific Investment Management Co. and Sculptor Capital Management Inc. are throwing their weight behind Adler Group SA as the company seeks to buy time and shake off the impact of fraud allegations.

• Pemberton Asset Management is fast-tracking plans to triple the size of its private debt funds and plug a European lending gap being created by increasingly skittish banks

• Superdry Plc is in talks with a specialist lender backed by US activist Elliott Capital Management to refinance a loan that’s due in a few weeks and is key to the retailer’s survival

• While much of Europe Inc. is shrinking state-backed loans from the pandemic, Italian companies are still sitting on mountains of such borrowings, complicating government efforts to help them surmount the latest crisis: soaring energy costs

Asia

A sense of uncertainty swept through Chinese markets on Monday as growing protests against Covid curbs and a record number of infections complicated the nation’s path to reopening.

• China Evergrande Group sold land once reserved to build its Shenzhen headquarters in a 7.5 billion yuan ($1 billion) deal that marks the latest disposal by the defaulted property giant

• South Korea is continuing with efforts to ease strains in its credit market, with local financial firms making a second round of contribution to a key bond stabilization fund redeployed in October

• Warren Buffett’s Berkshire Hathaway Inc. has kicked off its marketing of a potential multi-part yen bond that may price as early as Dec. 1

(Adds context on Treasuries move in fifth paragraph.)

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