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Tesla bonds were downgraded by Moody’s to B3 from B2, which also changed the outlook to negative from stable due to the significant shortfall in the company’s Model 3 production rate. The 2025 Tesla bond was yielding around 7.7 percent Wednesday, up from 6.80 percent Tuesday. Yields move opposite price. Tesla stock plunged 7.7 percent Wednesday.
Andrew Brenner of National Alliance said Tesla’s bond is not indicative of problems for other issuers, but there is a bit of concern around credit.
“It’s a signal for other risk assets that you have to be aware of the cash flows of the companies you’re buying,” said Brenner. “While Elon Musk may be taking us to Mars and everywhere else, he still has to come up with cash.”
The widening of spreads between corporates and Treasury yields is no where near fire alarm levels of past years, but it is a creep up in recent weeks that analysts have been monitoring.
“I think it’s indicative of a greater risk aversion,” said Boockvar.
The move is evident in LQD, the iShares 10+ Investment Grade Corporate ETF and HYG, the iShares iBoxx $ High Yield Corporate Bond ETF, both of which have declined since the start of February. LQD was slightly higher Wednesday, while HYG was lower.
“What it means is there’s a lot more volatility going on in the corporate space. People are taking money off the table. People are a little more concerned about risk assets. If you look at an options adjusted spread for investment grade [corporate debt] at the beginning of the month it was 88, today it’s 102. It’s widened 14 points,” Brenner said.
On Wednesday, Treasury yields at the long end moved lower, with the 10-year back to 2.77 percent, after breaking the key support at 2.80 percent Tuesday.
Ian Lyngen, head of U.S. Treasury strategy at BMO, said the move is reflecting the fading of optimism and the volatility in stock prices. But the move in Libor has been nagging at markets, even though it is being dismissed as technical.
“It’s the spread between Libor and OIS which people care about because that implies there’s a certain amount of risk in the credit system. The divergence between Libor and the implied fed rate has increased dramatically,” he said. “It affects a lot of corporate borrowing. It’s the reference floating rate for everything.”
Libor is the London interbank offered rate, the level at which banks lend to each other.
Brenner said at the beginning of the year, 3-month Libor was at 1.69, and it’s moved out 61 basis points since then. “We’ve only had one Fed rate hike. It’s moved out by 61 and you only have a 25 basis point hike,” he said. “Corporations have $2 trillion of Libor-based floating rate debt, so that’s costing them money.”
Analysts have said the move in Libor, however, is not sending the alarms it did when it shot up sharply during the financial crisis. They blame the jump in Libor on two factors: A much higher amount of short-term Treasury issuance and the fact that U.S. companies are bringing their overseas cash home, some of which was held short term securities.
“There’s more competition for some of this shorter dated issuance. That went for bills, or commercial paper, and there’s less demand for it because what were typically investors in those types of securities or paper, namely these firms that were investing their offshore earnings are no longer doing that to the extent they were,” said Jon Duensing, head of corporate credit at Amundi Smith Breeden.
“It’s an decrease in demand matched up with an increase in supply that’s pushed up the cost of money in short term funding markets. Traditionally, investors have looked to those short term funding markets as for signs of stress in the financial markets. I think you could call a supply demand imbalance a little bit of stress. It’s not like bank A doesn’t trust bank B,” he said.
