Rising government debt yields are driving up corporate borrowing costs. While this could dampen the buzz in the $ 40 trillion global credit markets, it won’t end the party.
The deployment of vaccines and US President Joe Biden’s $ 1.9 trillion stimulus package are raising expectations for growth and inflation. As a result, the yield on 10-year US government debt has risen more than 70 basis points so far this year, to around 1.64%. When this benchmark borrowing cost goes up, so do others: The median yield on investment-grade U.S. corporate bonds has risen by nearly a fifth since early February, to 2.27%, according to a Bank ICE index. of America.
Increased yields on safer bonds mean there is less incentive to buy riskier corporate debt. There have been outflows of long-term corporate bond funds from the United States in 13 of the last 15 weeks, according to EPFR. But so far the pullback is orderly: the premium that investors demand to hold corporate securities instead of sovereigns has not moved much. For example, the average difference between the yields of US Treasuries and junk bonds, which include issuers like automaker Ford Motor or Netflix, has risen 14 basis points since mid-February, to 355 basis points, according to ICE data. By comparison, this spread widened by nearly one percentage point in 2013 after then-Federal Reserve Chairman Ben Bernanke raised the possibility of reducing bond purchases.
This is because investors expect a rebound in economic growth to boost corporate earnings, limiting defaults and reducing debt burdens. Analysts at UBS, for example, forecast that the net leverage of risk-rated US companies will decline from 4.1 times ebitda at the end of last year to three times by the end of 2021.
And the cost of debt service has never been lower. High-performing US and European companies will generate on average enough EBITDA this year to pay 5 and 6 times interest costs, respectively, the Swiss bank calculates.
Credit investors can also count on central banks. ECB President Christine Lagarde has said she will increase bond purchases to keep financing conditions flexible. Furthermore, expectations of an acceleration in consumer prices mean that the inflation-adjusted profitability of the 10-year US government debt remains negative. This means that investors will continue to need to own corporate bonds to obtain a decent return.
The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gomez Down, it is the responsibility of Five days
– .
Great share! We loves your articles.