US debt investors spooked by Delta variant concerns

Investors have backed away from the debt of some of the most Covid-afflicted US companies, after re-evaluating the pace of the reopening of the American economy in light of the spread of the Delta variant of the coronavirus.

Bonds issued by cruise companies, cinema operators and retailers all fell in price last week, as more businesses delayed plans to return workers to offices due to the Delta escalation, with others opting to impose vaccine requirements on their staff.

The cinema operator and beneficiary of the meme stock craze AMC Entertainment’s $1.5bn bond, sold last year to help it survive the first wave of Covid-19, slid from close to 90 cents on the dollar to about 85 cents on Friday, inching lower still on Monday.

The price of office supply company Staples’ $1bn bond maturing in 2027 fell from more than 97 cents on the dollar to 94.5 cents on Friday, before edging above 95 cents to start this week.

The cruise ship operators Royal Caribbean and Viking have also sustained recent drops in the price of their bonds.

Delta is an obvious roadblock but we are essentially still on the path to recovery

The financial groups Wells Fargo and BlackRock have joined technology titans Apple and Amazon in delaying when staff would be required to return to offices. United Airlines also responded to nervousness over the spread of the Delta variant by mandating that all staff be vaccinated by autumn. 

“With the uptick in Covid investors are starting to get nervous,” said John McClain, a portfolio manager at Brandywine Global Investment Management. “Investors should be paying attention to the UK as their experience with the most recent peak in cases driven by the Delta variant is a leading indicator. There may be additional volatility given the lower liquidity in the summer.”

The moves across Covid-affected sectors are a sign of investors paring back bets on the pace of the recovery from last year’s downturn.

The sell-off continued on Monday, compounded by a slide in oil prices knocking into the debt of energy companies.

However, analysts and investors such as McClain do not see recent jitters significantly altering the outlook for corporate debt markets, with new funding still available to companies that need it and the economic recovery still under way, albeit at a decelerating pace.

“Delta is an obvious roadblock but we are essentially still on the path to recovery,” said Oleg Melentyev, an analyst at Bank of America. 

The additional yield above Treasuries, or “spread”, demanded by investors for owning riskier high-yield bonds has risen to about 3.5 percentage points, from a low of 3.16 percentage points at the beginning of July, according to data from ICE BofA indices.

The increase in risk premiums has been particularly pronounced in the lowest-rated rung of the corporate bond ladder. The triple-C rated bond spread has risen from a low of 5.88 percentage points last month to 6.75 percentage points on Monday.

The rise of Delta is also affecting the debt of companies already facing supply chain pressure. On last week’s earnings call for Itron, chief executive Thomas Deitrich said the maker of meters and sensors for energy and water utilities was enduring “supplier factory disruptions, logistics constraints, raw material and component shortages stemming from the pandemic”.

Itron’s $460m bond maturing in 2026 dropped from 102 cents on the dollar to less than 90 cents following the call. It has since retraced to just below 93 cents.