Lower for longer.
No, that’s not Federal Reserve Chairman Jerome Powell renewing his familiar vow to keep benchmark interest rates near zero well into future .
It’s also the mantra of the biggest part of the $9.8 trillion U.S. corporate debt market in the months since the Fed stepped in with its support to keep credit flowing during the pandemic.
As part of the Fed’s “do whatever it takes” policy, the central bank started buying up corporate debt for the first time ever in May, with a focus on investment-grade assets. It spurred a dramatic rally in bonds issued by U.S. companies, even though its own stake was only $3.6 billion at the end of July, and its daily pace of purchases recently slowed to a trickle .
Specifically, the closely watched ICE BofA US Corporate Index yield fell to 1.87% in the past week, a new low for the record books, or at least since about December 1996 when the index started tracking the performance of America’s corporate debt load. Yields fall as bond prices rise.
For context, the investment-grade portion of the corporate bond index had been hovering below 4.5% for much of the past decade, after touching an all-time high of 9.23% in October 2008 in the wake of the global financial crisis.
What that’s meant is that companies over the past decade not only borrowed in droves, and cheaply, in the bond market, but also tapped its financing powers for longer periods than ever before.
The pandemic only accelerated the activity, with bond issuance in the investment-grade corporate bond market hitting a record $1.4 trillion, or a 74% increase from a year ago, according to BofA Global data.
This chart from UBS shows the duration of the investment-grade bond market hitting a new high of 8.4 years at the end of July, when yields dipped below 2% for the first time ever.
In other words, corporate debts will take longer to repay and return less to investors serving as their creditors, even though the pandemic has derailed earnings at many companies.
As a sign of the times, Marriott International Inc. /zigman2/quotes/200170042/composite MAR -0.68% , the world’s largest hotel company and one of several major chains that furloughed workers and slashed staff at the onset of the pandemic, was able to borrow $1 billion at a 3.57% yield in the bond market on Wednesday through the sale of 12-year debt rated Baa3 by Moody’s and BBB- by S&P Global, or on the cusp of falling into the “high-yield” or junk-bond category.
Hotels have been one of the hardest-hit industries by the pandemic and the financing comes on the heels of Marriott reporting a bigger-than-expected 72% drop in revenue in the second quarter and an occupancy rate of 31% in July across its chains globally.
Arne Sorenson, Marriott’s president and CEO, said that while “folks are increasingly willing to step out and travel a bit more,” decisions by “big, big companies” to keep their offices closed for as much as the next year has been “frustrating to us,” because that’s “just sort of withdrawing from the economy,” during the company’s recent earnings call.
At the same time, some return on bonds is better than none.
“Yields are low everywhere, that doesn’t really tell you a lot,” said Greg Peters, head of multisector and strategy at PGIM Fixed Income, adding that Germany’s 10-year government bonds /zigman2/quotes/211347112/realtime BX:TMBMKDE-10Y +4.61% , and a host of others currently trade below zero.