The global credit machine is grinding to a halt.
The $2.6 trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, has come to a virtual standstill as the coronavirus spreads fear through company boardrooms.
In the U.S., Wall Street banks are facing their third straight day without any bond offerings, a rarity outside of holiday and seasonal slowdowns. European debt bankers had their first day of 2020 without a deal on Wednesday. And bond issuance in Asia, where the virus first emerged, has slowed to a trickle.
It’s a remarkable turn of events for a market where investors had been snapping up almost anything on offer amid a global dash for yield. Europe had been enjoying its strongest ever start to a year for issuance, and sales of U.S. junk bonds have been on the busiest pace in at least a decade.
Credit investors have been rattled by the potential impact on company earnings from disruption caused by the virus, which has seen huge parts of global supply chains shutting down. While markets have yet to see any panic selling, a derivatives index that gauges credit market fear in the U.S. had its biggest jump in more than three years on Monday as investors rushed to hedge against a wider selloff.
“It’s pretty serious,” said Shanawaz Bhimji, a fixed-income strategist at ABN Amro Bank NV, calling it a “very difficult” moment for investments in credit markets.
Honeywell International Inc., Virgin Money UK Plc and Transport for London were among the European borrowers readying deals before financial markets turned hostile. Before the slowdown, Europe had seen239 billion euros ($260 billion) of bonds sold in January alone.
The U.S. investment-grade market was expecting around $25 billion of sales this week before virus fears froze the market on Monday. Excluding the December holiday season and typical two-week summer hiatus in late August, there hasn’t been that long of abreak to start the week since July 2018.
Offerings also came to ahalt in the U.S. junk-bond market, where $67 billion of sales had been running at the fastest pace since at least 2009, data compiled by Bloomberg show.
Borrowing premiums on euro-denominated debt jumped to 95 basis points more than government bonds this week, the highest in 2020, according to a Bloomberg Barclays index. The U.S. index climbed to 107 basis points, the most since November.
Overall borrowing costs remain very low, however. A rally in U.S. Treasuries has sent all-in yields on U.S. investment-grade debt to record lows.
Citigroup strategists led by Michael Anderson warned that U.S. high-yield bonds, which haven’t been this cheap on a spread basis since October, still aren’t attractive enough to buy given thecaution on earnings calls.
Read more: Europe Debt Risk Jumps to Six-Month High on Coronavirus Fears
The number of coronavirus cases continues to climb, with the global death toll nearing 3,000. U.S. health officials have warned citizens to prepare for an outbreak, while South Korea has also emerged as ahot spot, with more than 1,000 reported cases there.
The worsening crisis is already taking a toll on companies’ balance sheets, with drinks makerDiageo Plc set to book as much as a 325 million-pound ($422 million) hit to organic net sales following significant disruption in Greater China since the end of January. French food maker Danone SAlowered its target for 2020 sales growth after slowing bottled water sales in China.
In the U.S., Mastercard Inc. shares tumbled as much as 7% this week after the companycut its revenue forecast as the spreading virus curbs international travel, while Apple Inc. said demand for iPhones in Chinatumbled 28% in January on the previous month.
Any sign that the epidemic is stabilizing may prove a fillip for sales, according to Luke Hickmore, investment director at Aberdeen Standard Investments in Edinburgh.
“We have seen before that any stability in markets tends to attract new issuance,” he said.
— With assistance by Paul Cohen, Priscila Azevedo Rocha, Rebecca Choong Wilkins, and Michael Gambale
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