Risk premium on U.S. investment-grade credit triples on virus worries

By Kate Duguid

NEW YORK (Reuters) - Concerns about the impact of the coronavirus on corporate America's balance sheets has tripled the premium investors are demanding to hold even the highest-rated corporate bonds.

The difference between the average yield of investment-grade U.S. bonds over virtually risk-free Treasuries widened to 303 basis points (bps) on Wednesday, according to the ICE/BofA investment grade index. That's up from 101 bps at the start of the year and the highest since July 2009.

For riskier high-yield securities, the average spread over Treasuries on Wednesday was 904 bps, the highest since October 2011, and more than 2-1/2 times the rate at the start of the year, using the ICE/BofA high-yield index.

The coronavirus has walloped earnings in sectors affected by reduced travel - including airlines, casinos and hotels - but also those dependent on discretionary spending as customers spend more time indoors and earn less money. Companies with supply chains in China have also been affected.

This hit to earnings has come at a time when U.S. corporate debt is near all-time highs, as is the size of the so-called triple-B segment of the market - companies one notch above junk status.

With their cash flow dwindling, those companies will need to depend more on funding markets. But the cost to borrow in those has risen in recent weeks; less access to cash puts these companies at a greater risk of downgrade.

Moody's Investors Service expects somewhere between 16% and 45% of North American companies to be negatively affected by the pandemic.

Investment-grade and high-yield exchange-traded funds have also fallen in recent weeks because of the negative outlook for companies.

The iShares iBoxx High Yield Corporate Bond ETF has fallen 18% this year, while the same company's investment grade fund is down nearly 14%. Short interest in both has also risen, with the cost to borrow shares of LQD currently at a six-year high, according to Samuel Pierson, director of securities finance at IHS Markit.

The Markit high-yield credit-default swap index - widely used as a gauge of sentiment about high-yield debt - saw its bid spread surge to its highest since 2009 on Wednesday. The equivalent investment-grade CDS index saw its bid spread rise to its highest since 2011.

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