May 21, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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Situational Awareness: At least 2.4 million people are expected to have applied for initial jobless claims last week.

🎙 “Societies are only as strong as the stories we leave behind and that innovation isn’t possible without imagination. The moral infrastructure of this country is doomed unless we let culture lead.” - See who said it and why it matters at the bottom.

1 big thing: Corporate debt issuance has already topped $1 trillion

Illustration: Eniola Odetunde/Axios

Barely five months into the year, U.S. investment-grade companies already have issued more than $1 trillion in debt — nearly as much as in all of 2019, which was well above average.

  • And buying shows no sign of letting up, thanks in large part to ultra-low interest rates and the Fed's promise of "no limit" purchases of Treasury, investment-grade corporate and even junk bonds.

What's happening: "Nearly $200 billion in debt has been issued in May so far as companies capitalize on growing risk-on attitudes," Bank of America research analysts said in a recent note to clients.

  • After $273 billion of outflows from bond funds in March, money has raced back into fixed income with positive inflows every week since mid-April, data from the Investment Company Institute show.

What to watch: Despite warnings of widespread downgrades, defaults and bankruptcies from various ratings agencies, credit analysts and the Fed itself, bond spreads are narrowing, indicating bullishness from investors as more of the U.S. economy opens for business.

  • "There's been a flood of issuance ... and the question is how much more can these spreads narrow," Subadra Rajappa, head of U.S. rates strategy at Société Générale, tells Axios. "My concern is that it seems like all this narrowing is a bit overdone."

Driving the news: Minutes from the Fed's latest policy meeting released Wednesday showed the central bank contemplating a program to cap the yields on short- and medium-term Treasuries known as yield-curve control — a policy employed by the Bank of Japan and Reserve Bank of Australia.

  • That would ensure borrowing costs stay low and likely encourage even more debt issuance from companies.

What could go wrong: Already warning that the economic damage from the pandemic will be deep and long-lasting, the Fed's latest financial stability report highlights the risk added by the growing corporate debt binge to exacerbate the coronavirus-driven recession.

Of note: Highly indebted “zombie” companies — firms that don't earn enough revenue to pay the interest on their debt — are one out of every six U.S. companies and currently control nearly 2.2 million jobs.

Flashback: "High levels of corporate debt likely won’t cause an economic downturn, but they may accelerate one as highly leveraged companies fail, forcing layoffs, decreasing aggregate demand and creating a downward spiral of bankruptcies and further layoffs," the U.S. Joint Economic Committee wrote in October 2019.

  • The committee cited Fed chair Jerome Powell himself, noting, “[a]highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments.”
2. Catch up quick

National restaurant chains including Starbucks, Chipotle and Shake Shack are lobbying property owners to renegotiate leases or offer deferred rent payments. (WSJ)

The U.S. may tighten restrictions on global chip sales to blacklisted Chinese telecom companies including Huawei. (Reuters)

The Senate passed legislation to boost oversight of foreign companies listed on U.S. stock exchanges, largely aimed at Chinese firms. (CNBC)

The U.S. pledged as much as $1.2 billion to AstraZeneca to help make the University of Oxford's coronavirus vaccine. (Bloomberg)

The total number of confirmed global coronavirus cases topped 5 million, with cases in Brazil jumping by nearly 500%, making it the nation with the third-most total cases. (Axios)

3. Millions took advantage of "financial hardship" programs in April

Reproduced from TransUnion; Table: Axios Visuals

The number of borrowers not making payments on their credit cards and auto loans rose by thousands of percentage points in April as nearly 15 million credit cards and 3 million auto loans were placed in “financial hardship” programs.

  • The numbers have surged from March, when less than 0.01% of credit cards and about 0.6% of auto loans were in the programs, according to data from credit reporting agency TransUnion.

Yes, but: The programs allow borrowers to temporarily stop making payments, suggesting voluntary elections rather than missed payments.

The big picture: TransUnion notes that its measure of consumer liquidity has increased as forbearance programs reduce monthly minimum payment obligations and free up capital for Americans.

  • The company also notes that credit card balances are decreasing as consumers reduce spending and make larger payments.
  • Credit scores generally have been stable with overall credit ratings actually increasing with fewer consumers in the subprime risk tier.

Between the lines: Mortgage delinquency rates declined slightly, with 94.4% of loan holders current in April, up from 93.7% in March, and the foreclosure rate has ticked down from March by 9.7 percentage points.

4. Coronavirus cuts income across the U.S.
Data: Census Household Pulse Survey; Map: Danielle Alberti/Axios

Axios' Stef Kight reports: Nearly half of U.S. households have lost income since mid-March — but the suffering varies widely by state, according to survey data released Wednesday by the Census Bureau.

Why it matters: Income losses are particularly common in states that have borne the brunt of the coronavirus pandemic, like New York and New Jersey.

  • But Southern states like Mississippi have experienced some of the most dire economic impacts, such as food scarcity and housing insecurity.

The big picture: The Census Bureau released the first two weeks of data on Wednesday from its new weekly survey intended to gauge how Americans are faring during the pandemic.

  • The latest results seem to reveal that in states with higher poverty rates, people didn’t have much money in the first place and now struggle to pay the rent and buy food.

More than half of respondents in Hawaii, New Jersey, Nevada, Louisiana, Michigan, California, New York and Oregon said they or someone in their household had experienced a loss in employment revenue.

  • Many of these states have large tourism industries and high-density cities — some of which suffered massive COVID-19 outbreaks.

Yes, but: Despite the widespread loss of income since mid-March, 72% of respondents in a new Quinnipiac University poll say their own financial situation is "excellent" or "good."

Meanwhile, a handful of Southern states saw more people struggling with essential basics like food and shelter, according to the Census survey, even though fewer people there reported experiencing pay cuts.

  • In Mississippi, 45% missed last month’s rent or mortgage payment or said they had little to no confidence their household could pay next month’s rent or mortgage on time.
  • 20% said they sometimes or often did not have enough to eat in the past week.

Methodology: The experimental Census survey is based on responses provided by 74,413 people for week one results and 41,996 people for week two results.

Go deeper: Coronavirus is bringing economic suffering across the U.S.

Dion Rabouin

Thanks for reading!

Quote: “Societies are only as strong as the stories we leave behind and that innovation isn’t possible without imagination. The moral infrastructure of this country is doomed unless we let culture lead.”

Why it matters: Deana Haggag is an artist, cancer survivor and the president and CEO of United States Artists. She describes herself on her website as a disabled first-generation Egyptian-American Muslim woman of Afro-Arab descent.

  • I hope you've enjoyed the quotes from some well-known and inspiring Muslim figures during the month of Ramadan. Eid al-Fitr, the "festival of breaking the fast," is Saturday, marking the end of sunrise-to-sunset fasting for Ramadan.
  • Even if you're not Muslim, it's a great opportunity to have a feast and celebrate family and all the good things in your life.

See you Tuesday!