U.S. corporate bond spreads widen as investors cut risk on hawkish Fed – Reuters

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., January 25, 2022. REUTERS/Brendan McDermid/File Photo

NEW YORK, Jan 28 (Reuters) – Investors sold high-yield and investment-grade U.S. corporate bonds on Friday, accompanying stock market weakness and a sign of risk aversion amid concerns over a series of interest rate hikes.

The Markit North American High-Yield CDX Index, which tracks the cost of insuring high-yield corporate debt and is a junk market indicator, fell to a low of 105.947%, the lowest since November 2020 , as investors sold the contract betting on credit deterioration.

That was down about 1 percentage point from Wednesday, when the US Federal Reserve hinted at multiple interest rate hikes this year.

Spreads on Markit’s North American Investment Grade CDX index hit 62.5 basis points, hitting their highest level since November 2020, as investors bet on deteriorating credit quality.

Investors pulled back from U.S. corporate bonds alongside weakness in major U.S. equity indices after the Fed signaled in a policy update this week that an interest rate hike may be coming soon and that it would advance policy tightening measures to fight inflation relentlessly. .

“People are expecting a bunch of rate hikes, they’re expecting the[Fed’s]balance sheet decline to be faster and earlier than they expected even a few months ago,” Ryan O said. ‘Malley, bond portfolio manager at Sage. Council in Austin, Texas.

Spreads, which refer to the interest rate premium investors demand to hold corporate debt over safer US Treasuries, tightened last year as government debt yields rose. plummeted, bringing money into securities with lower credit ratings than Treasuries.

“Silver got pushed to the ends of the risk spectrum because you couldn’t get anything from early Treasuries or investment grade… Now that the tide is receding, people don’t don’t want to own the riskiest things anymore,” O’Malley said.

The yield spread on the ICE BofA US High Yield Index (.MERH0A0), a commonly used benchmark for the junk bond market, widened to 346 basis points on Thursday from 325 basis points on Wednesday, after the Fed day.

Yet, while the rise in spreads is consistent with a decline in risk appetite, some investors expect them to rise only slightly due to a still strong economic backdrop.

“I don’t think spreads are expected to widen in the corporate sector…companies are in a strong financial position, they’ve enjoyed two years of easy money,” said Jack McIntyre, portfolio manager at Brandywine Global .

For research firm Capital Economics, unless stock market weakness triggers a broader loss of investor confidence, spreads should only rise slightly over the next few years.

“This is underpinned by our view that while global economic growth will slow, the economic backdrop is still likely to be quite positive; we don’t anticipate anything that would significantly test the ability of businesses, in general, to service their debts,” he added. said in a report Friday.

Reporting by Davide Barbuscia; Editing by Alden Bentley and Nick Zieminski

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