Bonds are under immense pressure amid growing expectations of accelerated economic recovery. Bonds of highly rated companies in the US have lost an average of 5.3% since the start of the year, marking the second-worst start to a new year since 1996.
The sell-off in the bond market comes amid growing expectations that the COVID-19 vaccination drive and new stimulus will boost the economy. Likewise, growth and inflation are expected to edge higher, conversely reducing the appeal of bonds’ fixed payments.
Investors are increasingly turning to high yields and riskier investments, betting on ongoing economic recovery. Investors shunning the fixed payments offered by most bonds have seen a focus shift to yields, with the benchmark 10-year Treasury note rising to one-year highs of 1.7%.
Amid the sell-off of highly rated companies, bonds low rated oil firms continue to raise record amounts in the bond markets. A bounce back in oil prices above the $50 a barrel level is the catalyst fuelling investor appetite for high yield bonds from low-rated US energy firms.
Low-rated energy firms have raised a record $20 billion in the bond market since the start of the year, a record amount going back to 1996. Chesapeake is one of the companies that have raised close to $1 billion on senior notes’ issuance despite emerging from bankruptcy early in the year.
Amid the investment spree on low-rated company bonds, investors remain extremely cautious in the short term. Oil firms’ prospects depend a great deal on the global economy bouncing off the pandemic’s shackles. The pandemic being brought under control should spur oil demand which should amount to booming business for the companies.
However, there is a cloud caution given the ongoing developments in the energy industry. A transition from fossil fuels with an increased focus on renewable energy remains the biggest tailwind to most energy companies.
Oil companies are not the only ones wary of the market long term outlook. A good number of US companies remain anxious amid a surge in yields and inflation that continues to push borrowing costs higher. Amid the rising yields, companies have started exploring ways of locking in low borrowing costs.
Car renter Avis Budget Group and MSCI Inc. have already started selling new bonds as they look to raise sufficient capital at low costs to buy back existing notes. However, the companies must also contend with the fees of buying back some of the notes, which in most cases would be non-existent if the companies waited much longer.
Shrugging off the fees, Axis sold $600 million worth of bonds as it sought to pay off notes in May of last year. The company had to pay $60 million in fees for paying back much earlier before expiry. Likewise, there are reports that $70 billion of outstanding bonds could be in the way as companies look for additional capital to finance buybacks.