Automakers’ bonds are seeing their prices rise, but they’re lagging the broader universe of high-grade bonds. — Bloomberg
NEW YORK: Bond investors are getting a little more concerned about the outlook for automakers that could see their bottom lines hit by US tariffs.
The extra yield that bondholders get for owning investment-grade car bonds instead of Treasuries has widened about 0.2 percentage point since the end of January.
Automakers’ bonds, like debt in general, are seeing their prices rise, but they’re lagging the broader universe of high-grade bonds, where spreads have widened just 0.08 percentage point, according to Bloomberg index data.
Yesterday, a pair of bonds due this year from General Motors Co subsidiary GM Financial widened by more than 10 basis points each in secondary trading, according to Trace data.
That came after the car maker sold fresh debt in the United States last week with spreads, or risk premiums, about 0.1 percentage point more than if there weren’t tariff risk, according to Todd Duvick, an analyst covering auto bonds at research firm CreditSights.
When Paccar Inc, a maker of commercial trucks, sold bonds in February, it paid about 0.1 percentage point more than its existing bonds, a concession that reflected tariff risk, Duvick said.
That’s a surprising twist for a company with a relatively healthy balance sheet that would normally not pay anything extra, he said.
Earlier last month, GM Financial was hit in the Canadian corporate debt market too.
The company had to boost spreads on a bond it was selling to bring yields above its existing notes.
That’s a rarity in the Canadian dollar market now, where investors’ strong demand has pushed yields on new bonds to lower levels than existing securities.
US President Donald Trump has confirmed 25% tariffs on most Canadian goods imported to the United States, and he has promised 25% tariffs on automobiles as soon as April.
Canada is preparing to retaliate with counter tariffs. A trade war could reduce Canadian output by 2.5% in two years and wipe out growth, according to the Bank of Canada.
Stellantis NV, the maker of Chrysler cars, has already paused work at its assembly plant in Ontario, which employs about 3,000 workers.
Automakers would be among the hardest-hit companies, given how freely goods currently travel across United States, Canadian and Mexican borders during manufacturing.
Car manufacturers may have to absorb rather than pass along some of the costs, CreditSights’s Duvick said.
Automaking is a competitive industry. Tariffs could boost US car prices by as much as US$12,000, according to a study by automotive consulting firm Anderson Economic Group.
Consumers can only absorb so much of the added cost burden. The price of new cars and trucks has risen more than 20% since 2019.
“If we have material tariff concerns in the credit markets, Canadian autos are where you are going to see that concern expressed first,” said Adrienne Young, director of Canadian corporate credit research for Franklin Templeton Fixed Income.
The trade wars that are gearing up now could have a global impact on credit markets.
Some European businesses in threatened industries have been accelerating borrowing plans to get ahead of any punitive measures.
US bonds from carmakers could also broadly get hit.
Manuel Hayes, a senior portfolio manager at Insight Investment, is watching to see if at least some automakers have their bonds cut to junk status.
If there are such downgrades and many money managers are forced to sell their holdings, he’ll consider buying the so-called “fallen angels”. — Bloomberg
