Corporate bond market wavers ahead of US election


Corporate bond markets are beginning to creak ahead of the US election as investors become more skittish, fearful that rising coronavirus cases and delays in Washington on further stimulus could hit the US economy.

Investors have sought to walk a tightrope in recent weeks, balancing America’s uncertain political direction and what it means for the response to the pandemic against supportive monetary policy, with the Federal Reserve continuing to signal its intent to stand behind credit markets. 

The premium in borrowing costs that investors demand on lowly rated corporate bonds over Treasuries — known as the spread — has recorded the largest three-day rise since the start of June, according to ICE Data Services based on Wednesday’s close.

The junk bond spread had been holding at its lowest level since February, highlighting how placid credit markets have been in recent weeks. Polls pointing to a Democratic victory in the upcoming elections bolstered hopes that Washington will pass a new stimulus to shore up the economy. At the same time, support from the Fed had helped offset concerns about how the worsening pandemic will affect corporate America.

Line chart of Spread vs Treasuries (percentage points) showing US junk bond spreads have begun to rise from recent lows

However, in a sign of how markets have become more jittery this week, two junk bond sales have been pulled, according to people familiar with the transactions. One of the deals was a $325m bond being sold by franchise restaurant operator Sizzling Platter, a company that sits in one of the sectors worst affected by restrictions on socialising. 

“We are not in the mode of nothing is wrong in the world,” said Ashish Shah, co-head of fixed income at Goldman Sachs. “Credit markets are reflecting the risks that exist but they are also reflecting the positives.”

Rapidly rising cases of coronavirus in many European countries and the worsening of the outbreak across America hit asset markets broadly this week. The S&P 500 stock index has fallen roughly 5 per cent, while Brent crude oil prices have dropped close to 10 per cent.

A deadlock between the Trump administration and Democrats in Congress on a new round of fiscal stimulus measures has also weighed on sentiment.

Dan Ivascyn, chief investment officer at asset manager Pimco, said credit investors, who have been “counting on a meaningful improvement in virus containment over the next few months”, need to be “very careful”.

He said that supportive fiscal and monetary policy could offer a temporary reprieve for the industries worst affected by the pandemic, like airlines and cruise operators, but “at a certain point it becomes a solvency issue”.

“The clock is ticking,” he said.

Line chart of High Yield CDX Spread (basis points) showing Cost of default protection edges higher ahead of the US election

The warning comes alongside subtle signs that investors are guarding against a surprise election result.

The default risk implied by derivatives called credit default swaps, used by investors to protect against the corporate bond issuers reneging on their debts, has steadily risen over the past fortnight, according to data from Markit, implying greater hedging activity among portfolio managers. 

Options on credit default swaps that expire shortly after the US election have also risen notably in price, suggesting that investors are particularly concerned about the risk of a sell-off in the corporate debt market next month, according to analysts at BNP Paribas. 

“A lot of hedges have been put in place. The price you pay for options expiring immediately after the election is very expensive,” said Viktor Hjort, head of credit research at BNP. 

Coronavirus latest: Norway tightens restrictions despite low infection rate


Matthew Rocco

Sales of newly built homes in the US slowed for the first time in five months, retreating from a 13-year high.

New home sales came in at a seasonally adjusted annual rate of 959,000 single-family houses in September, the Census Bureau said on Monday. That was down 3.5 per cent from a revised 994,000-unit pace in August, which was the strongest level since December 2006. Economists had expected new home sales to top 1m last month.

The US housing market has helped lead the economy’s rebound from the worst of the coronavirus-fuelled crisis in the spring, as buyers seek out roomier dwellings during the pandemic and capitalise on record-low mortgage rates. Existing home sales – which account for the majority of transactions – hit a fresh 14-year high in September, their fourth straight month of growth.

Although demand is strong, housebuilders are facing cost pressure from rising lumber prices. Economists have also cautioned that some budget-conscious buyers may be priced out of the market.

The median price for new homes sold last month was $326,800, up 3.5 per cent year on year.

“Bottom line, inventory is most needed in the under $300k price range but that is where the margins are the slimmest. As most of the buyers here are first time, they are very sensitive to higher prices notwithstanding the mitigation of lower rates,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

There were 284,000 new homes for sale at the end of the month on a seasonally adjusted basis, compared with 282,000 in August. At the current sales pace, the sector has 3.6 months’ worth of supply, up from 3.4 months in August.

“The shortage of homes for sale, along with strong homebuilder sentiment and lean inventories of existing homes, should support new home construction even if the pace of sales cools in the months ahead,” analysts at Oxford Economists said.

They estimated that new home sales will moderate in the fourth quarter, citing a “weak labour market” and a rise in Covid-19 cases.

New home sales in September fared worst in the northeast, which was down 28.9 per cent versus the prior month. Sales in the Midwest and south fell 4.1 per cent and 4.7 per cent, respectively. The west bucked the downward trend, with sales up 3.8 per cent.

Europe fears the worst as coronavirus surge threatens to overwhelm hospitals


European governments have warned of an alarming rise in the number of coronavirus infections across the continent from west to east, an autumnal second wave that threatens to overwhelm hospitals and will sharply increase the death toll in the weeks ahead. 

“The situation is grave,” Pedro Sánchez, Spain’s prime minister, said on Friday, a day after the country recorded a new daily record of almost 21,000 infections.

His words echoed those of Jean Castex, his French counterpart, who extended a night-time curfew that will cover 46m people, or two-thirds of the population, from midnight on Friday.

“The weeks ahead will be hard. Our hospital services will be put to the test and the number of deaths will rise,” said Mr Castex, shortly before France announced a record 41,622 cases in the previous 24 hours. 

Overburdened hospitals in Roubaix and Tourcoing in northern France have begun transferring Covid-19 patients to other hospitals, but officials have warned that a transfer system that saved lives in the stricken eastern region in the pandemic’s first wave in the spring will not be much use if every part of the country and its neighbours are also badly hit. 

President Emmanuel Macron, who is anxious to avoid another economically crippling nationwide lockdown, was due to visit a hospital in Pontoise near Paris on Friday to show support for hospital staff amid the deepening crisis. 

According to the health department, more than 14,000 patients are now hospitalised in France with Covid-19, of whom 2,319 are in intensive care — which means almost half of the country’s intensive care beds are filled by patients with the virus. A further 165 hospital deaths were reported on Thursday, taking the total number of fatalities to 34,210. 

Germany saw new infections climb above 10,000 for the second day running, as a country that got through the first phase of the pandemic relatively unscathed now contemplates a potentially brutal second wave.

The Robert Koch Institute, Germany’s main public health authority, registered 11,242 new coronavirus infections over the previous 24 hours. So far, 9,954 people have died of the disease in Germany.

Ireland, the UK and countries in central and eastern Europe are also facing a grim resurgence in the pandemic. 

Poland is to introduce a range of sweeping restrictions on public life in an effort to stem a drastic rise in coronavirus infections that has put the country’s health system under intense pressure. 

Prime Minister Mateusz Morawiecki said public gatherings would be limited to a maximum of five people; restaurants, bars and cafés would have to close for two weeks except for takeaways; and all pupils above the third grade, aged eight, would have to switch to remote learning. 

Medical staff at a drive-through Covid-19 testing centre in Zegrze, Poland, on Tuesday © Pawel Supernak/EPA-EFE/Shutterstock

On Friday, Poland reported 13,632 new cases, its worst day of the pandemic so far, and 153 deaths. Almost three-fifths of the country’s 228,318 total cases have come since the start of October. 

The town of Warrington in northern England has meanwhile agreed with the UK government to enter the highest tier 3 level of coronavirus restrictions after a mounting number of cases. The town lies between Liverpool city region and Greater Manchester, which entered tier 3 on Friday. 

Under tier 3 restrictions, pubs that cannot function as restaurants must close, along with betting shops, adult gaming centres, casinos and soft-play centres. People must not socialise with anybody not in their support “bubble” indoors, in any private garden or at most outdoor hospitality venues and ticketed events.

Additional reporting by James Shotter in Warsaw and Andy Bounds in Huddersfield

Coronavirus latest: Fed’s Quarles cautions need to strengthen short-term funding markets


Andy Bounds in Manchester and Sarah Provan in London

Greater Manchester is seeking an extra £90m in financial aid in return for tighter coronavirus restrictions as a noon deadline for talks with the UK government approaches.

Prime minister Boris Johnson has threatened to impose the “tier 3” category of restrictions unilaterally to curb a rise in infections that could overwhelm hospitals.

The government said that within two weeks all critical-care beds in Greater Manchester will be taken by Covid-19 patients and insists that it has offered local leaders a “good package” of £22m.

“The real risk is by the first week of November in the current trajectory there will be no ICU places left in Greater Manchester,” said Nadhim Zahawi, a business and industry minister. “All will be occupied by Covid patients,”. He added that over the next couple of weeks the region is in danger of a greater level of infections than in March and April.

The tighter rules would require all pubs to shut that cannot operate as restaurants, and stop households from mixing indoors or outside. Betting shops, casinos, bingo halls, adult gaming centres, and soft play areas are likely to close but not gyms, according to a letter from communities secretary Robert Jenrick, seen by the Financial Times.

But Andy Burnham, Labour mayor of Greater Manchester, struck a defiant note on Tuesday morning, telling BBC Radio 4’s Today programme that the deadline was “slightly provocative”. The mayor believes the region needs £15m a month to support those who would not be able to work and analysts believe restrictions would last until April, although they would be reviewed every four weeks.

“There is more to come if Andy wants to negotiate it to commensurate with what we have done with the Liverpool region and Lancashire,” said Mr Zahawi on Sky News on Tuesday. Those two regions received £30m extra for entering tier 3, which would equate to £56m for Greater Manchester, which has a higher population of 2.8m.

Mr Burnham and Richard Leese, leader of Manchester city council, on Monday said the government had removed from negotiations a previously discussed “hardship fund” that would have topped up furlough payments to those deprived of work by any tougher restrictions.

“The government could have a deal if it better protects low-paid people. It is choosing not to do that,” Mr Burnham told the Financial Times. The local leaders also accused the government of using “selective statistics” on hospital occupancy rates to bolster the case for tougher rules.

Mr Zahawi said regional lockdowns remained “the best way to deal with the resurgence of Covid 19”.