Investors Hunt for Corporate-Bond Winners in Coronavirus Economy

Investors are racing to find winners and losers in the corporate-bond market as coronavirus wreaks havoc on the markets.

They are demanding far greater returns for holding corporate debt, particularly for companies dependent on tourism or travel. The spread, or extra yield that investors demand over Treasury bonds to hold corporate debt, has been increasing at unprecedented speed, according to Morgan Stanley analysts.

But there are pockets of winners, too, including debt for health-care and technology companies.

The spread on investment-grade corporate bonds rose 0.72 percentage point last week and 1.23 percentage points this year, to 2.16%, according to Bloomberg Barclays data. Investors view bond spreads as an important indicator of the economy's health.

"Recession risks are now clearly elevated, and we expect that there will be a hit to U.S. growth," said Anwiti Bahuguna, head of multi-asset strategy at Columbia Threadneedle Investments. "If the spread of the coronavirus disrupts demand for a prolonged period beyond the next two months, the impact on growth will be more significant."

Some investors view the higher spreads as a chance to jump into corporate bonds for bigger returns, even if the potential risk is bigger, too. They believe spreads have been too tight in recent years, with investors not demanding enough.

"There's more risk priced in, but we're seeing the market at much more attractive spreads," said Oleg Melentyev, strategist at Bank of America Corp., who now sees the corporate-bond market pricing a 90% chance of recession.

Some sectors are struggling more than others. The coronavirus is hampering tourism and travel world-wide. Royal Caribbean Cruises Ltd. (RCL) bonds due in November are down more than 15 cents on the dollar this year, to 85 cents, according to MarketAxess.

At the same time, oil prices are plunging, a decline sparked by a feud between Saudi Arabia and Russia but escalated as more Americans work from home and curb everyday trips.

Some energy companies are faring better than others. Bonds due in 2022 backing Pioneer Natural Resources Co. (PXD), which extracts crude from the ground and sells it to refiners, are down around 9 cents on the dollar this year, to 96.397.

Whiting Petroleum Corp. (WLL) bonds due in 2021 are down more than 94 cents this year, to 23 cents. Apache Corp. (APA) bonds due in 2028 are down more than 32 cents to 72 cents. The two are more highly leveraged.

Also hard-hit are lower-rated, speculative-grade corporate bonds. There, spreads over Treasurys are up 3.91 percentage points this year as of Friday, to 7.27%. More than 55% of speculative-grade corporate bonds trading below 80 cents on the dollar are tied to the energy sector, according to CreditSights. Telecommunications is second, followed by gambling.

Satellite operator Intelsat SA (I) speculative-grade bonds due in 2023 have fallen 16 cents on the dollar this year as of Friday, to 70.5 cents. Bonds due in 2027 backing casino giants Penn National Gaming Inc. (PENN) and Wynn Resorts Ltd. (WYNN) are down more than 25 cents over the same period, to 80.5 and 78.25 cents, respectively.

Sectors that have remained relatively resilient include health care and technology, with both industries providing crucial services to Americans dealing with the coronavirus pandemic. Bonds due in 2025 backing the pharmaceutical maker Novartis International AG are up slightly this year, to 100.526. International Business Machines Corp. (IBM) bonds due in November this year are roughly flat, at 101.187.

Write to Sebastian Pellejero at sebastian.pellejero@wsj.com


  (END) Dow Jones Newswires
  03-17-20 0714ET
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