While US high-grade credit spreads have tightened remarkably well and the market is back to functioning with some sense of normalcy, a fear still lingers that a surge of Covid-19 infections could derail the progress.
Issuers have rushed to market to sell more than US$660bn of the US high-grade bonds in the roughly two months since the Federal Reserve announced its corporate bond purchasing program to help companies struggling with the devastating impact of the pandemic.
While the issuance pace has not subsided, there is a growing concern that the market could seize up if the Covid-19 infection rate rises sharply as many states open up after lock downs. A number of states have seen infection rates, hospitalizations and death rates plateau and decline since implementing various measures to combat the spread of the virus.
"There is concern about reopening too soon, and then being in a position of having to issue in an inopportune market versus preserving liquidity ahead of time," said Todd Mahoney, head of fixed-income syndicate at UBS.
"I don’t think companies are going to regret issuing at these levels and preserving liquidity in advance of some potential troubled times ahead."
Even as fatigue is setting in among the investors who have absorbed nearly US$1trn of IG debt year-to-date, borrowers still managed to price more than US$48bn in the market this week ahead of the Memorial Day weekend.
Investors are increasingly gravitating to a select pool of higher-quality names to deal with the unrelenting supply, said Meredith Contente, managing director of corporate high grade credit at Amherst Pierpont.
"People are risk adverse right now because they don't know when we'll see another spike," she said.
"Until we've seen some evidence that reopening in states aren't causing a resurgence of the virus, they are going to gravitate toward the higher-quality names and only dip their toes in the Triple Bs if we don’t see that resurgence."
Even if the economy does open up safely, there has been a psychological toll on the American consumer that is not likely to go away soon.
In a survey of corporate managements conducted by Citigroup, more than half of respondents are expecting a "U-shaped" recovery while just 13% expect a sharp and quick "V-shaped" recovery out of the recession.
"Even if you open up the economy the risk is that activity is very slow to come back and it never really comes back fully until you have a vaccine," said Hans Mikkelsen, head of US high grade strategy at Bank of America.
"Probably the worst thing that can happen is the economy opens up and then you have to shut it back down, and then you start wondering how many times are we going to have to do this?"
VACCINE JOLT
Despite these concerns, the rally in credit has been strong.
Average US credit spreads tightened to 201bp over Treasuries this week in from the wides of 400bp of in March before the Federal Reserve announced its corporate credit facility, according to ICE BofA data.
Spread even jolted 20bp tighter this week on news that a vaccine developed by Massachusetts-based pharmaceutical company Moderna showed encouraging results in an early trial of eight volunteers.
Additionally, companies such as Inovio and Pfizer as well as researchers at Oxford have begun early human tests of the vaccine, which helped push average credit spreads 20bp tighter on the week.
"You have a good chance that we will have a vaccine by the fall," Mikkelsen said. "But, it's two-sided because there is a very grim risk that this could take a long time."