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- Investors searching for a near-term play should take a page from the Federal Reserve’s playbook and look to corporate debt, Bank of America says.
- Investment-grade debt already enjoyed a bump from the Fed’s announcement of new corporate credit facilities, and the firm’s strategists wrote Friday that the sector would rally further as the central bank started bond purchases.
- Companies eligible for the central bank’s aid will jump first before gains spill over into non-eligible bonds, the team added.
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Investors looking for value in coronavirus-battered financial markets should follow the Federal Reserve, Bank of America said Friday.
The “Fast and Furious” weeks of coronavirus sell-offs escalated stresses on the corporate credit market and increased the chances of a near-term recession, the team of strategists led by Hans Mikkelsen said. While economic recovery is months away, the Fed’s coming purchases of corporate bonds present short-term opportunities for investors, according to the firm.
The central bank lifted the cap on future asset purchases on March 23, ushering in fresh Fed stimulus and immediately driving Treasury prices higher. Newly established credit facilities for ailing companies lifted the corporate bond market from a threatening slump.
The corporate bond rally has already been reflected in broad sector trackers like the iShares iBoxx $ Investment Grade Corporate Bond exchange-traded fund. The ETF soared about 12.4% from its March 19 low after the Fed’s intervention drove investors into the popular vehicle.
Bonds are poised to rally further in the near future, Bank of America said, as the Fed’s intervention eases market stresses and liquidity stabilizes. Companies eligible for the central bank’s aid will jump first before gains spill over into non-eligible bonds, the team said.
The spread between corporate credit yields and Treasurys are off from their March 23 highs, but “the rally does not stop there as investors grow more comfortable that the COVID-19 outbreak is under better control and the economy can ramp up,” they added.
Debt needs to be rated investment-grade to tap into the Fed’s new facilities, setting up such bonds for a healthy jump. The supply of investment-grade debt has fallen by $89 billion so far as ratings agencies downgrade firms on coronavirus risks, according to Bank of America. The demand-side of the market is also poised for a boost, as outflows slow from previous weeks’ record levels.
Credit health will most likely improve as well, as high-yield issuers look to draw from the Fed’s new pools. A “sizable rating upgrade cycle” in European high-yield debt followed the launch of the European Central Bank’s corporate debt purchase program in June 2016, the bank said. A similar pattern may arise in the US as firms shore up cash and “fight more for their IG ratings,” the team added.
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