Bank of America: Basic materials bonds outperform as weak housing and cost pressures divide credit views

How did basic materials bonds perform this week?

In the week ended 30 October 2026, investment-grade basic materials bond spreads narrowed by 2 basis points, while the corporate bond index spread was unchanged; the former posted excess returns of 16 basis points, versus 2 basis points for the corporate bond index.
Chemicals and paper and packaging led the sector, with spreads narrowing by 3 and 2 basis points respectively; other subsectors performed broadly in line with the corporate bond index.

Amid weak residential construction and cost inflation, CRH cut its 2026 EBITDA guidance by about 5%; Vulcan Materials also lowered its full-year guidance to the low end of its original range because of higher energy costs. But demand in the aggregates business remains relatively resilient, and Vulcan expects gross profit per ton of aggregates to continue growing in 2027.
CRH has completed its approximately 8.5 billion-dollar acquisition of Arcosa, expanding its US aggregates business and adding exposure to energy transmission. BofA expects the company to issue the equivalent of 4 billion to 6 billion dollars in bonds in the near term to refinance the bridge loan and short-term debt used for the acquisition.
New bond supply may temporarily weigh on existing bonds, but CRH’s spread is wider than the corporate bond index and about 10 basis points wider than Vulcan’s. BofA sees value in the current spread and maintains its overweight recommendation.

D.R. Horton’s quarterly earnings, home sales gross margin and fiscal fourth-quarter orders all fell short of market expectations; the company expects promotional activity to remain high in fiscal 2027, while construction costs rose 1% quarter over quarter due to higher lumber, labor and fuel prices.
BofA believes weak demand and margin pressure are sufficient to explain its spread, which is about 20 basis points wider than the single-A index, and sees limited room for further narrowing. It therefore downgraded its bond recommendation from overweight to neutral.
Meritage Homes’ third-quarter new orders were about 9% below expectations, and it did not provide guidance for 2026 or the fourth quarter because of limited visibility. BofA estimates its adjusted leverage is above 2 times and close to S&P’s downgrade threshold, but believes its spread, about 35 basis points wider than the BBB index, already reflects its weaker credit profile. It maintains a neutral recommendation.

Eastman Chemical’s third-quarter adjusted earnings per share were 1.84 dollars, below the market consensus of 1.92 dollars; its fourth-quarter earnings-per-share guidance of 1.10 to 1.30 dollars was also below the consensus of 1.34 dollars, with reasons including a seasonal decline in end-market demand and higher planned shutdown costs.
The company lowered its 2026 operating cash flow guidance from nearly 900 million dollars to about 850 million dollars, including an expected release of about 250 million dollars in working capital in the fourth quarter. Management expects operating cash flow to grow significantly in 2027, provided the Middle East conflict does not escalate further and conditions normalize; BofA considers it unlikely that both conditions will be met.
Although BofA has become slightly more cautious on Eastman, it believes end-market headwinds are broadly reflected in the spread and maintains a neutral recommendation. Paint maker Sherwin-Williams faces weak housing demand, raw material inflation and potential acquisition risk; BofA considers its spread too tight and maintains an underweight recommendation.

Freeport’s third-quarter adjusted EBITDA was 3.208 billion dollars, above the market consensus of 3.088 billion dollars. Ore processing throughput at Grasberg recovered to about 67% of the normal pre-incident level, and the company still expects to reach about 80% capacity by mid-2027 and nearly full capacity by year-end.
Restart progress has reduced execution risk, but Freeport lowered its 2026 copper sales guidance from 3.1 billion pounds to 3 billion pounds and raised its 2027 capital expenditure guidance by 400 million dollars to 5.2 billion dollars. Its bond spread is about 15 to 20 basis points tighter than those of larger, more diversified mining peers; BofA believes it does not adequately compensate for the remaining restart risk and maintains an underweight recommendation.
Nucor expects fourth-quarter earnings to be flat or slightly higher than in the third quarter, better than market expectations of a 5% sequential decline; steel mill order backlog grew 5% quarter over quarter, and data centers account for about 15% of the company’s total backlog. However, BofA sees limited room for further spread tightening and maintains a neutral recommendation; even if lower capital expenditure in 2027 improves free cash flow, incremental cash may be returned mainly to shareholders.