Automakers' Bonds Are a Hot Trade Now That Tariffs Are in Limbo
(Bloomberg) -- European carmakers are selling the most new bonds in years, seeking to take advantage of a calmer window in US President Donald Trump's trade war as well as strong investor demand for the high yields on offer.
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Automakers and parts manufacturers including Volkswagen AG and Mercedes-Benz Group AG sold more than €13 billion ($14.8 billion) of bonds in May, making it the busiest month for euro issuance in the sector since early 2017. Many more have launched deals in the first week of June, including a trio of junk-rated companies that supply components from car seats to steering wheels.
The flood of sales comes after carmakers were effectively shut out of the market during the turmoil that followed Trump's so-called 'Liberation Day' announcements in early April. Since then, the president has retreated or scaled back various tariffs, including on auto parts, and markets have bounced back. At the same time, high demand for these sales — because of their hefty yields — are encouraging others to come to market.
'With the market feeling better and the buzz around tariffs somewhat abating, issuers are being opportunistic and tapping the market,' said Raphael Thuin, head of capital market strategies at Tikehau Capital. 'Financing is coming at a premium, but demand has been strong.'
Deals from blue-chip carmakers have been well received, with BMW AG getting €6.5 billion in orders for a €2.5 billion offering. This week's junk-rated deals have also been popular. Volvo Car AB pulled in more than €1.9 billion orders for a €500 million sale, while French parts supplier Forvia SE — which saw its bonds tumble after Trump's April announcements — was able to increase the expected size of its offering.
Investors are piling into the deals because tight bond spreads across the market haven't left much higher-yielding debt to invest in.
The average yield on investment grade auto bonds sold in May was 3.49%, according to data compiled by Bloomberg compared with an average yield of 3.14% for an index of European high grade corporate bonds as of Thursday's close.
Yields on junk-rated bonds are also proving tempting for investors. Troubled German parts firm ZF Friedrichshafen AG sold a five-year bond this week with a 7% yield, compared with 4.75% when it last sold euro debt in January 2024. The €1.25 billion sale pulled in more than €4.5 billion of orders.
Demand has been helped by index-benchmarked investors, who may have cut their positions in the sector during April's turmoil and are now rebuilding them. 'This is a good opportunity to reduce underweights on credits, with deals pricing attractively,' said Chris Higham, portfolio manager at Aviva Investors.
And there's plenty of cash to put to work. Money managers have been pouring money into European fixed income bond funds, with investment grade inflows hitting $3.14 billion and high-yield inflows reaching $1.02 billion in the week to May 28, according to EPFR data cited by Bank of America Corp.
Still Cautious
To be sure, carmakers are not out of the woods, with further tariff turmoil likely and levies on raw materials — like steel and aluminum — potentially making their costs more expensive. The current increase in borrowing costs may add to challenges in the future as well.
Gordon Shannon, a portfolio manager at TwentyFour Asset Management said he has been 'startled with the way bond investors have embraced autos.' He cited the huge orders that investors put in for a Volkswagen AG hybrid bond — the riskiest type of debt that a corporate can sell — as an example of excessive enthusiasm.
Tikehau's Thuin agrees. 'We view the sector as still facing long term structural headwinds which are nowhere near disappearing,' he said.
'Although the sector is trading cheap, we are still very cautious.'
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