The bubble spawned by the Fed in the corporate bond market this year - which was already at unprecedented levels thanks to record low interest rates before Powell's March announcement he would backstop the bond market and buy investment grade and fallen angel bonds - is nothing short is staggering.
Consider this: on Tuesday, total new investment grade issuance totaled $11.2BN across 11 deals, bringing the total to $195.3BN MTD and - drumroll - just over $1 trillion, or $1,002.9BN YTD, or less than five months. And the bigger the bubble, the greater the demand: according to Bank of America, the average break performance improved to -11.9bps Tuesday from -8.0bps Monday, with the week’s new issues already trading 8.4bps tighter on average from pricing!
The reason for this relentless bid - the Fed's backstop of this most important (for future buybacks) market: as a result, inflows to US IG bond funds and ETFs have rebounded sharply in April and May from the record outflows in March, with BofA noting that "about 90% of the total AUM is in “Agg” type funds that provide broad US IG fixed income market exposure by investing in Treasuries, agencies and mortgage securities in addition to corporate bonds. We estimate that corporate bonds account for 41% of IG bond fund and ETF AUM, of which 34% is passively managed."
Whatever is behind the relentless bid, however, it is certainly not fundamentals, as downgrades – including Apache Corp and Service Properties Trust this week – are soaring to never before seen levels. Net IG downgrades (downgrades less upgrades) so far since the end of February have totaled $1,126bn.
Furthermore, according to BofA, the cumulative IG rating change this cycle has reached 115% of the cumulative 12-month net downgrades during the 2015 commodity crisis, but remains below the 2011 US fiscal crisis and the global financial crisis at 93% and 55% of those experiences, respectively.
At the sector level, BofA notes that Banks/Brokers had the most downgrades since the end of February ($285bn, or 28% of the total), followed by Energy ($200bn) and Autos ($160bn, Figure 8). Over this period 97% of Auto sector notional was downgraded (on net), followed by 89% for Banks/Brokers and 82% for Leisure (Figure 9).
Large issuers have accounted for the majority of the downgrade volumes. In Energy and Autos the top three issuers were 54% and 62% of the total sector downgrades since the end of February, respectively (Figure 10, Figure 11).
Overall issuers with the largest downgrade amounts adjusted for the size of the rating change include OXY ($77bn), ORCL ($54bn), F ($52bn), and BA ($29bn, Figure 12).
Going forward BofA expects even more fallen angel activity...
... as currently $159bn of BBB-rated DM IG bonds trade at or wider than BB-rated index spread (Figure 15).
Currently 64% of BBBrated Finance sector bonds trade at BB spreads, followed by 38% for Leisure and 16% for Energy (Figure 17).
Finally, BofA lists "investment grade" index issuers trading at BB-spreads or wider, which shows that while Powell may be well "ahead" of the fundamental curve - by simply buying every IG bonds regardless of merit - the rating agencies remain far behind it.