By Randall W. Forsyth
Mars may have huge underground supplies of water, according to a study released this past week. Water that had been on the red planet's surface three billion years ago apparently seeped deep below the surface, probably too far down to support life, however, and unlikely to be able to provide a resource for future missions to Mars.
Mars Inc., by contrast, was able to tap a veritable river of liquidity for its $36 billion acquisition of Kellanova. The privately held purveyor of Milky Way, Three Musketeers, and M&Ms candies this past week said it would help fund the purchase of the spinoff from WK Kellogg, which markets other nutritious fare such as Pop-Tarts and Pringles, with a $29 billion short-term loan from JPMorgan Chase and Citigroup.
That would be the biggest high-grade mergers-and-acquisitions debt deal in nearly a year, Bloomberg reported. The bridge financing would be replaced by long-term permanent financing, it added. That could come via the public corporate bond market or the burgeoning private-credit sector (in which case, closely held Mars wouldn't have to open its books for the public).
In any case, the Mars-Kellanova merger added to indications that the corporate credit market remains vibrant and financial conditions are accommodative. You wouldn't have known that early the week before, when stocks suddenly dropped sharply amid a big spike in options-implied volatility.
The violent move largely was the result of effects of unwinding so-called yen carry trades, which sent Japanese stocks into a free fall that carried over into Western markets on Monday, Aug. 5, That prompted some hair-on-fire calls for the Federal Reserve to respond to the market dislocations with an immediate 75-basis-point slash in its federal-funds target range, which currently stands at 5.25%-5.50%, followed by another similar-size cut at its next policy meeting, on Sept. 17-18. (A basis point is a hundredth of a percentage point.)
Credit markets also reacted, but in more subdued fashion. Spreads -- the extra yield demanded by investors to compensate for corporate securities' extra risk over risk-free Treasury notes and bonds -- increased, but relatively slightly. And more to the point, the modest increase in spreads was met by a surge of demand from fixed-income investors, which corporations tapped into by selling huge volumes of new bonds.
Capital remained readily available, including for sub-investment-grade borrowers, according to a Morgan Stanley report. The primary market gives a better sense of whether real stress existed in financial markets than a secondary-market price correction, the bank added.
New issuance has been unseasonably active while much of Wall Street and its institutional customers are on summer holiday. The firm's tally of investment-grade volume rose to almost $84 billion for the month through Thursday, and the year-to-date tally to over $1.1 trillion, compared with $1.2 trillion for all of 2023.
Also featured among the week's slate was another M&A-related offering, a five-part, $5 billion deal from Eli Lilly to fund its $3.2 billion purchase of Morphic Holding. Far from showing any distress, investors viewed the widening of spreads as a buying opportunity, wrote BMO Capital Markets fixed-income strategist Daniel Krieter, with Tuesday's issues 4.8 times oversubscribed. And in the below-investment-grade sector, the poplular iShares IBoxx $ High Yield Corporate Bond exchange-traded fund hit a 52-week high Friday.
The point of this bond market inside baseball is that it shows the near-hysterical calls for emergency Fed action that filled financial news airwaves the Monday before last were silly, self-serving, or both.
Since then, however, the fed-funds futures have trimmed back expectations of central bank rate reductions. A 25-basis-point cut again seems most likely next month, with a 74% probability as of Thursday, according to the CME FedWatch site, after having priced in as much as a 50-basis-point cut during the Aug. 5 stock selloff.
How much Fed rate cuts would bring down Treasury yields, if at all, is an open question. According to a research note by Michael Livian, the eponym of wealth management firm Livian & Co., much of the anticipated reductions may have been discounted. The yield on the benchmark 10-year note already had fallen, from 4.70% in April to 3.84% by Wednesday. (It was back up to 3.92% late on Thursday.) In real terms, 10-year Treasury inflation-adjusted securities yields are down to 1.80%, from 2.24% in April and 2.44% last October.
Yields, not price appreciation, are what matters in the long run to fixed-income investors, he adds -- more than all the returns from corporate and government bonds over the 25 years through 2023 -- while price changes actually shaved 0.25% from annual returns.
In other words, don't count on Fed actions to boost bond returns. The yield you see now may be just the yield you get over the longer term. And don't look for Jay Powell & Co. to bail out risky asset markets, as much as those whose livelihoods depend on them want them to.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
August 16, 2024 10:57 ET (14:57 GMT)
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