By Cristal Cody
Tupelo, Miss., March 16 – High-grade issuers stood back on Monday as the financial markets nose-dived following the Federal Reserve’s Sunday emergency rate cut of 100 basis points in response to the coronavirus’ threat to the economy.
The Dow Jones industrial average sank nearly 3,000 points on the day, closing down 12.93%, or 2,997.1 points.
The S&P 500 dropped 11.98%, while the Nasdaq declined 12.32%.
Panic selling triggered a circuit breaker that caused trading to stop for 15 minutes at the start of the session.
Treasuries resumed last week’s rally after closing Friday lower. The benchmark 10-year yield declined 22.3 bps to 0.728%.
“We expect 10[-year] Treasury rates to remain below 1.25% in 2020 and finish the year closer to 0.5%,” according to a Piper Jaffray note on Monday. “However, in the very near term 10yr Treasury rates may drop to 0% or even turn negative.”
The Markit CDX North American Investment Grade 33 index eased to a spread of 121.73 bps on Monday from 120.34 bps on Friday. High-grade credit spreads finished last week 35 bps wider.
The White House recommended on Monday for Americans to gather in groups of no more than 10 and to work from home if possible for the next 15 days.
Bars and restaurants have been ordered shut in several states, with only delivery and pick-up allowed.
Schools across the country are closed for extended spring breaks or longer, and church services are widely canceled.
Retailers including Apple Inc. are closing stores or shortening hours for the remainder of March.
A flurry of announcements for ratings downgrades and watch notices continued on Monday for a variety of companies and industries, including Boeing Co., Nissan Motor Co. and Exxon Mobil Corp.
S&P Global Ratings said that rating activity remains mostly negative.
“While we expect most issuers to face modest revenue declines in 2020 due to challenging end markets, supply chain disruption or lower demand due to the spread of Covid-19 could add greater pressure to credit quality in the near term,” S&P said in a release.
Market participants, including on syndicate desks and at rating agencies, moved forward with plans to work from home for the foreseeable future.
On Sunday, the Federal Reserve implemented its second emergency rate cut this month before its scheduled meeting that was expected to start Tuesday, lowering the federal funds target range to 0% to 0.25%.
The Fed also plans to begin purchasing Treasuries in a quantitative easing program that was conducted after the 2008 financial crisis. The QE program will include $500 billion in Treasuries and $200 billion in agency mortgage-backed securities.
On Monday, the Federal Reserve also urged banks to use its Federal reserve discount window that provides short-term loans to banks.
“The Fed's actions should help to stem some of the panic in markets, but it is just the start,” BofA Securities, Inc. analysts said in a research note.
| “We think the | proper policy | response | will | require | coordinated and forceful action from both the fiscal and monetary front,” the analysts said. “Businesses are shutting doors globally and households are moving into quarantine.”
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| Tone had improved enough on Friday that three issuers tapped the high-grade bond market, bringing the week’s volume to just over $7 billion.
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| This week, anywhere from zero to up to $60 billion of bond issuance is expected, with a backlog growing heavy, market sources report.
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| Near-term deal volume is likely to be compounded by upcoming earnings blackout periods, a source said.
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| Retail, bank, energy bonds soften
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| In the secondary market, high-grade paper was mostly weaker early Monday with bonds gapped out, sources report.
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| Walmart Inc.’s senior notes (Aa2/AA/AA) traded about 25 bps to 45 bps wider.
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| Goldman Sachs Group Inc.’s 2.6% senior notes due Feb. 7, 2030 (A3/BBB+/A) softened in strong trading over the session.
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| The paper went out weaker at 94.77 from 95.21 at the open and down from 96.57 on Friday and a 101 handle in the same period a week ago.
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| Goldman Sachs sold $2 billion of the notes on Feb. 5 at 99.96 to yield 2.06% and a spread of Treasuries plus 95 bps.
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| Energy Transfer Operating LP’s 3.75% notes due May 15, 2030 (Baa3/BBB-/BBB-) widened more than 45 bps during the session to the 463 bps interpolated area.
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| The notes were down more than 1 point on the day at 87.77.
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| On Wednesday, the issue was last quoted trading at 92.57 and the 409 bps interpolated area.
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| The Dallas-based natural gas midstream and intrastate transportation and storage company sold $1.5 billion of the bonds on Jan. 7 at 99.843 to yield 3.769% and a Treasuries plus 255 bps spread.
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