NEW YORK - U.S. corporate debt has already rebounded on the back of the Federal Reserve’s unprecedented support for the market, but investors like PIMCO still see value in some top-shelf names, saying the risk of default is lower than current prices indicate.
Credit spreads, which on March 23 were the widest since the financial crisis, have narrowed considerably. The spread, using the ICE/BofA investment-grade corporate index .MERC0A0 has narrowed by 155 basis points while the high-yield index .MERH0A0 has narrowed by 317 basis points. Spreads - referring to the difference between the yield on corporate credit over safer Treasuries - typically widen when the perceived risk of default rises.
Prior to the March 23 intervention, corporate bond valuations implied a default rate of 25% cumulatively over five years, said Kiesel. By comparison, he said, 2.9% was the maximum cumulative five-year default rate recorded previously in default studies conducted by Moody’s Investors Service. Analysts at Bank of America listed in a research note on Tuesday “four reasons to favor credit over equity”, noting it recovers faster, spreads are currently wide, there are fewer downgrades to “fallen angel” status expected and there is powerful Fed support.
High-yield exchange-traded funds have risen, like the iShares iBoxx High Yield Corporate Bond Fund which is up 5.5% since market close on Wednesday, before the Fed’s announcement.