U.S. junk bond spreads narrow on optimism about Pfizer's COVID-19 vaccine

NEW YORK (Reuters) - Spreads of the riskiest U.S. corporate bonds were the narrowest since February on Monday, moving in step with record jumps in U.S. stock indexes, after Pfizer Inc PFE.N said its experimental COVID-19 vaccine was more than 90% effective.

Experts welcomed the first successful interim data from a large-scale clinical test as a watershed moment in fighting the coronavirus pandemic.

The price of the iShares iBoxx High Yield Corporate Bond ETF HYG.P - an exchange-traded fund which tracks the U.S. junk-bond market - rose to its highest since March 4.

In afternoon trade it retraced some of those gains but remained up 1.42% at $86.44.

Markit's North American High-Yield CDX Index CDXHY5Y=MG - which tracks the cost to insure high-yield corporate debt and is a proxy for the junk market - rose as far as 108.47%, the highest since Feb. 21, as investors bought the contract betting on fewer credit defaults. That can also be expressed as a spread of 315 basis points, also the lowest since February.

“If the market can have confidence that your business will be around in the post-COVID world, they will give you the financing to bridge your way to that,” said Tom Graff, head of fixed income at Brown Advisory.

“That’s what this vaccine allows for.”

As the trade into economically-sensitive stocks thrived, U.S. Treasury yields jumped, with the benchmark 10-year yield US10YT=RR rising to its highest since March. That widened the Treasury yield curve to the highest since February 2018. [US/]

Despite the dramatic jump in high yield, investment grade credit, which is less economically sensitive, moved less.

The spread of Markit's North American Investment-Grade CDX Index CDXHY5Y=MG was last narrower by about 2 basis points, while the high-yield index was about 43 basis points narrower.

The smaller move in investment grade was therefore erased by the jump in Treasury yields, explained Andrew Brenner, head of international fixed income at NatAlliance, leaving the iShares iBoxx Investment Grade Corporate Bond ETF LQD.P last down 0.65% to $135.31.

“You’re seeing low-quality credit outperform the most because those are the companies that most needed that good news and for whom it was most time-sensitive,” said Graff.

Reporting by Kate Duguid; Editing by Megan Davies and Mark Heinrich