MW Bonds issued by defense contractors are being snapped up, as stocks fall on talk of spending cuts

By Ciara Linnane

Bond spreads have tightened in recent weeks as stocks have slumped on fears 'DOGE' to target Pentagon

U.S. defense stocks have taken a drubbing in recent weeks, and took a steep downturn late last week after President Trump mooted cutting defense spending in half, but bonds issued by those companies are telling a different story.

Trump said he would raise the topic with the leaders of Russia and China at coming talks.

The group's stocks fell about 6% last week and are down about 12% in the last three weeks, according to Vertical Research Partners. Adding to the gloom created by Trump's comments, there are concerns that Elon Musk's "DOGE," or the so-called Department of Government Efficiency, is about to set its sights on the sector.

European stocks rallied last week, while U.S. stocks were selling off, led by contractor Leonardo DRS Inc. $(DRS)$, which is down almost 18% in February to date.

By contrast, spreads on the sectors' bonds have tightened and investors have been snapping them up, as the following charts from data solutions provider BondCliQ Inc. show.

"Investment-grade bonds spreads are tight, but yields at these levels are driving the buying, which is mostly by systematic and buy & holders," said one market source.

The following chart shows the spread movement in five-year bonds, many of which are yielding more than 5%.

The next chart shows flows for the year so far, with Boeing Co. $(BA)$ being the main beneficiary.

Boeing has by far the most outstanding bonds in the group, at almost $54 billion worth, according to FactSet data. That's followed by RTX Corp. $(RTX)$ with about $38 billion and GE Aerospace $(GE)$ with about $19 billion worth.

Earlier in February, Trump said Musk was heading to the Pentagon to seek to eliminate wasted spending. The unelected Tesla Inc. $(TSLA)$ chief executive has also criticized the F-35 fighter-jet program, which he believes should be replaced by drone technology.

That has weighed on the stock of the maker of F-35s, Lockheed Martin Corp. $(LMT)$, which is down 12% in the year to date to mark the worst performance in the sector.

-Ciara Linnane

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February 18, 2025 13:29 ET (18:29 GMT)

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