March 4, 2020 / 9:22 PM / in a month

UPDATE 1-U.S. corporate bonds gain as risk appetite returns

(New throughout)

By Kate Duguid

NEW YORK, March 4 (Reuters) - U.S. investment-grade and high-yield corporate bonds gained on Wednesday as investor appetite for riskier assets returned.

Investors who in recent weeks sought refuge in safe-haven assets were emboldened by the passage on Wednesday of an $8.3 billion U.S. bill to fund coronavirus containment and a 50-basis point interest-rate cut from the Federal Reserve the day prior. The electoral victories of moderate Democratic candidate for president Joe Biden during the Super Tuesday primaries also helped boost markets.

Two major investment-grade exchange-traded funds hit fresh record-high prices in early trade Wednesday after having hit new records on Tuesday following the Fed announcement. The iShares iBoxx Investment Grade Corporate Bond ETF hit a record of $134.06 and was last up 0.10% at $133.35. The PIMCO Investment Grade Corporate Bond ETF hit a record $114.24 and was last trading up 0.41% at $113.97.

In the riskier high-yield market, the trade price of the iShares iBoxx High Yield Corporate Bond ETF was up 1.37% and the SPDR Bloomberg Barclays High Yield Bond ETF was up 1.34%.

“With equities positive and somewhat approaching flat between today and yesterday and the fact that the Fed has said we’re going to keep interest rates low for longer and maybe coordination, I think people are going to buy high yield,” said Andrew Brenner, head of international fixed income at NatAlliance Securities.

In spite of the market’s ebullience, some investors were pessimistic about the credit outlook for companies on the brink of downgrade or in sectors particularly affected by the outbreak.

U.S. corporate debt is at all-time highs, as is the size of the so-called triple-B segment of the market - companies one notch above junk status. Sudden shocks to the economy, like that seen in China this year, disrupt cash flow and put companies at a greater risk of downgrade.

“The result is deteriorating credit quality, at a time of poor technical conditions for several segments of the U.S. corporate bond market,” wrote Mohamed El-Erian, chief economic adviser to Allianz in an article in the Financial Times on Tuesday.

Credit ratings agency S&P Global in a report published Tuesday said vulnerable industries included autos, which has been hit by a slowdown in both Chinese production and demand, aviation and energy.

“A severe coronavirus pandemic could materially reduce cash flows in the gaming, restaurant, leisure and hotel sectors and lead to some distress,” wrote analysts at Fitch Ratings.

Reporting by Kate Duguid; Editing by Steve Orlofsky and Cynthia Osterman

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