U.S. Treasury yields were slightly higher Friday, as the record pace of U.S. investment-grade corporate bond supply took center stage in the debt markets, even as big-tech earnings pointed to the coronavirus pandemic’s damage to business.
What are yields doing?
The yield on the 10-year Treasury note TMUBMUSD10Y, 0.615% rose 2.2 basis points to 0.641%, while the 2-year note yield TMUBMUSD02Y, 0.199% edged up 1.6 basis points to 0.202%. The 30-year Treasury bond yield TMUBMUSD30Y, 1.250% advanced 1.2 basis points to 1.279%. Yields and debt prices move in opposite directions.
For the week, the 10-year yield advanced 4.7 basis points, the 2-year shed 1.2 basis points and the 30-year “long-bond” rose 10.4 basis points
What’s driving the market?
Treasury prices fell, edging yields higher, even though U.S. equity benchmarks tumbled Friday, while May kicked off with the expectation of no letup in the recent deluge of U.S. corporate bond supply.
Corporate bonds offer higher yields than their risk-free Treasury counterparts, and as of two months ago, can also count on the Federal Reserve as its main backstop.
With the Fed at their backs, companies have rushed to stockpile cash, often by issuing bonds or drawing down their credit lines, ahead of what is expected to be several quarters of pinched profits during the coronavirus pandemic.
Earnings reports late Thursday from Apple Inc. AAPL, -1.61% and Amazon.com Inc. AMZN, -7.59% underscored how painful the business environment may get in the months ahead. Shares of both were trading lower in afternoon action, with weakness in Apple attributed to the iPhone maker’s decision not to provide guidance on the quarter ahead, while Amazon warned it could lose money as it ramps up spending.
Of note, Boeing Co. BA, -5.42% landed a large $25 billion corporate bond financing on Thursday at significantly lower costs than bankers initially anticipated, a day after the embattled plane maker reported a net loss of $641 million for the first quarter.
Meanwhile, March and April saw a combined $558 billion of borrowing in the U.S. investment-grade corporate bond market, a record pace that Goldman Sachs expects to continue in May and push 2020’s issuance volume to a new all-time high of $1.5 trillion.
BofA Global Research analysts think May could add another $150 billion to $250 billion of investment-grade supply, while pointing to recent newcomers to the market who expect the Federal Reserve, through several of its emergency credit facilities, to take the exposure off their hands.
The Fed facilities have an estimated $750 billion capacity to buy corporate bonds, potentially a significant chunk of what is likely to be newly issued this year.
Bond investors Friday were also weighing President Donald Trump’s threat to consider tariffs on China, citing Beijing’s handling of the pandemic.
What are analysts saying?
“The major factor in the market is that we’ve had a tremendous amount of corporate bond supply,” Tom di Galoma, managing director rates at Seaport Global, told MarketWatch. “That’s having an overwhelming effect on bond prices.”
While not every likes the idea of the Fed lending to U.S. corporations after the past decade when many piled debt up high, bought back their own stock and paid out dividends, Matt Freund, head of fixed-income strategies and co-chief investment officer at Calamos Investments, thinks it is the backstop the market needs.
“You can stop the fire when it’s small by subsidizing activities you may not like,” he told MarketWatch. “Or you can wait until it ricochets in the economy and gets bigger over time.”