Despite Ongoing Impact of COVID-19... Will Junk Bonds Revive Amid Market Interest?

[Asia Economy Reporter Jeong Hyunjin] Among U.S. investors, cautious optimism is emerging regarding the economic impact of the novel coronavirus infection (COVID-19), leading to growing interest in corporate bond issuances by companies with speculative-grade ratings, the Wall Street Journal (WSJ) reported on the 31st (local time).

According to the report, cruise line company Carnival began marketing $300 million worth of 3-year maturity corporate bonds on the same day. Although Carnival's credit rating is investment grade, credit rating agencies are currently reviewing a downgrade, and operations have been virtually halted due to the impact of COVID-19. As a result, the interest rate level on the new corporate bonds is expected to be significantly higher than before.

This follows the issuance of high-yield bonds in the U.S. market by Yum Brands, the parent company of KFC and Pizza Hut, for the first time since April 4th, announced the previous day. WSJ stated, "With optimism that the U.S. can recover from the COVID-19 pandemic without a full credit crisis, investors are purchasing speculative-grade bonds in the secondary market, and companies with lower credit ratings are beginning to issue bonds."

According to Bloomberg Barclays data, as of the 27th of last month, the average yield on U.S. speculative-grade corporate bonds was 9.67%, down from 11.57% a week earlier. However, this is still a rapid increase compared to 5.64% as of April 4th. Yields fall when bond prices rise, which is interpreted as an increase in bond demand.

However, as the COVID-19 outbreak continues and the economic repercussions have not yet concluded, concerns about speculative-grade companies have not completely disappeared. Therefore, the market expects that whether bond issuances succeed will depend on the circumstances of the issuing companies.

Interest in speculative-grade bonds has emerged following investment-grade companies raising large amounts of funds through corporate bond issuances. According to Dealogic, investment-grade companies including Nike, McDonald's, and CVS Health issued $73 billion worth of corporate bonds just last week. This week, investment-grade companies such as Oracle are also issuing corporate bonds.