Bonds Away

Wild swings in commodities prices and declining and volatile stock markets have gotten most of the attention over the past few weeks. Investors and traders have been spooked by the Russia-Ukraine war and the implications of Western sanctions.

Moves in global bond markets have been tame by comparison, but there have been signs of stress there as well. Investors have had to contend with both geopolitics and the Federal Reserve starting to raise interest rates.

The yield on the 10-Year U.S. Treasury note has traded below 1.75% and above 2.2% in just a two week span—big moves for the benchmark yield.

Over in the corporate debt market, things haven't been going as smoothly as butter either. Last night, Bloomberg reported that Tesla pulled a $1 billion asset-backed security sale in the middle of marketing the offering, after some buyers had already placed orders. That rarely happens.

The sale was meant to be of securities backed by Tesla customers' car leases. Barron's Al Root explains:

This bond sale isn’t traditional debt. It’s an asset-backed security backed by car leases. Most car companies use the asset-backed market to fund automotive financing. Any car company can keep automotive lease receivables on the balance sheet or package them for investors. Ford Motor, for instance, has tens of billions of financing receivables on its balance sheet. Tesla has a few billion dollars.

Most companies, including Tesla, need asset-backed markets as a source of capital to run their businesses. In the absence of the asset-backed market, a company would have to use its own balance sheet to fund leasing.

Tesla can handle not finishing this offering, however. The electric-vehicle maker has some $18 billion in cash on its balance sheet, and analysts expect it to generate about $15 billion in cash flow in 2022.

It's not the only bond offering to be scrapped in the past week. Online consumer lender Affirm Holdings and auto-financing firm World Omni Financial also withdrew planned sales of asset-backed securities.

Rising interest rates, the removal of the Fed as a buyer in the market for mortgage-backed securities market this year, and concerns about liquidity appear to be behind the moves, according to reporting by Barron's Alexandra Scaggs.

Read her full report on the latest goings-on in the bond market here.