Outlook 2021: Investment-grade corporate spreads retrace wides; bonds mixed; BBBs soft

By Cristal Cody

Tupelo, Miss., Dec. 31 – Investment-grade bond spreads moved out as lockdowns began in response to Covid-19 but mostly recovered by the end of the year.

“When you look at credit spreads in investment grade, obviously we’ve been on a wild ride this year,” Hans Mikkelsen, head of U.S. high-grade strategy at BofA Securities Inc., said in an outlook press conference in December. “We started at 100 basis points on the ICE index and widened to 401 basis points, and we’re now at 112 basis points.”

High-grade corporate spreads retraced about 96% of spread widening to 119 bps from 402 bps at the 2020 wides, according to BofA Securities research notes.

“We look for spreads to move closer to the tight end of historical range during 1H-21,” BofA analysts said. “While we look for the index average spreads to remain little changed over 2021, the steeper Treasury curve and lack of yield globally should flatten the spread curve.”

In 2021, high-grade corporate spreads are forecast to be in a 90 bps to 130 bps range.

Investment-grade credit sectors were recovering by the year’s close.

Leisure space credit spreads were 585 bps over Treasuries on April 14 and recovered to Treasuries plus 162 bps by mid-December, said Ron Quigley, author of ‘Quigley's Corner’ and head of fixed income syndicate, primary sales and senior FIG/Utilities banker at Mischler Financial Group Inc.

Spread swings

The bond markets remained attractive, particularly for investment-grade paper, in 2020, sources said.

Refinitive Lipper US Fund Flows reported 2020 investment-grade corporate fund net inflows of $132.798 billion for the year through Dec. 16.

“Secondary market inflows,” Quigley noted. “It’s amazing.”

New issues were mixed in the secondary market over the year but saw smaller spread moves as the year wound down, sources report.

General Dynamics Corp.’s $4 billion of guaranteed senior notes (A2/A/A) that priced in five tranches on March 23 came in about 70 bps to 100 bps in the secondary market in the days following pricing amid the start of the pandemic.

The Falls Church, Va.-based global aerospace and defense company’s $1 billion of 3.625% notes due April 1, 2030 were seen on March 27 about 80 bps tighter at 220 bps bid.

The notes priced at 98.947 to yield 3.752% and a Treasuries plus 300 bps spread, compared to talk in the Treasuries plus 320 bps to 325 bps area.

The tranches remained higher than issuance as the year wrapped up, a market source said.

The 3.625% notes were last seen in strong trading in mid-November at 119 and softer at the 118 area in light December secondary volume.

Boeing Co.’s mega $25 billion seven-tranche offering of senior notes (Baa2/BBB) that priced on April 30 quickly tightened about 10 bps to more than 20 bps across the stack in secondary trading. The notes remained strong into December.

The company’s 5.15% notes due May 1, 2030 headed into the year’s end with a 120 handle, improved from the 107 area seen in May.

Boeing sold $4.5 billion of the 10-year notes at par to yield a Treasuries plus 450 bps spread, tighter than guidance in the Treasuries plus 525 bps area.

BBB trades at junk

Meanwhile, some high-grade issuers traded at junk bond levels over the year.

By December, $58 billion of investment-grade BBB issuers traded at or wider than BB-rated index spreads, mostly in the energy and finance sectors, BofA Securities analysts said.

Currently 5% of the BBB-rated energy sector bonds are from issuers trading at BB spreads, followed by 4% for finance and 2% for insurance.

High-grade issuers trading at BB spreads or wider as the year closed included Patterson-UTI Energy Inc., Antares Holdings LP, Aircastle Ltd. and Owl Rock Technology Finance Corp., according to BofA Securities.

Secondary market spreads of affected industries are expected to remain impacted with high Covid-19 infections estimated over the first part of 2021 but show better prospects in the second half of 2021, sources report.

High-grade steadies

New issues were mixed late in the year but not by as big of spread moves as seen in the spring, sources report.

Nasdaq, Inc.’s $1.9 billion of senior notes (Baa2/BBB) that priced in three tranches on Dec. 7 traded about 4 bps tighter on the short end and about 1 bp softer on the 10- and 20-year tranches in the secondary market after pricing.

Nasdaq sold $1.9 billion of senior notes (Baa2/BBB) in three tranches, including $600 million of 0.445% notes due Dec. 21, 2022 at a 30 bps over Treasuries spread.

Initial price talk was at the Treasuries plus 70 bps area.

Nasdaq priced $650 million of 1.65% notes due Jan. 15, 2031 with a 75 bps over Treasuries spread, compared to talk at the 110 bps over Treasuries area.

The company’s $650 million of 2.5% notes due Dec. 21, 2040 priced at a spread of 80 bps over Treasuries, compared to guidance at the 115 bps spread area.

CVS Health Corp.’s $2 billion of new and reopened senior notes (Baa2/BBB) brought to the market in two tranches on Dec. 7 were flat to about 2 bps tighter in secondary trading.

The company’s $750 million tap of its 1.3% notes due Aug. 21, 2027 that priced at a spread of Treasuries plus 67 bps versus guidance at the 85 bps to 90 bps over Treasuries area, tightened about 2 bps.

The company first sold $1.5 billion of the 1.3% notes on Aug. 12 at a Treasuries plus 85 bps spread.

CVS Health’s new $1.25 billion tranche of 1.875% notes due Feb. 28, 2031 traded wrapped around issuance. The notes priced with a 95 bps over Treasuries spread, tighter than talk in the 120 bps area.

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