Conditions are deteriorating across all corners of the corporate credit market amid growing concern over the prospect of interest rates staying elevated for an extended period.
(Bloomberg) — Conditions are deteriorating across all corners of the corporate credit market amid growing concern over the prospect of interest rates staying elevated for an extended period.
The average yield on US blue-chip bonds stood at 6.15% Monday, topping last year’s high of 6.13%. Investment-grade credit spreads have widened 11 basis points from the lows of 2023 seen in July. At least two corporate borrowers stood down from issuing Tuesday as volatility pushed Treasury rates higher and stocks lower.
Elsewhere, the largest speculative-grade bond ETF is mired in its biggest two-day slump this year, while the cost to insure against default on an index of junk-rated debt reached its highest in close to five months.
“The market is starting to price higher for longer,” said David Knutson, senior investment director at Schroder Investment Management, adding that smaller companies on aggregate are more exposed to higher borrowing costs than larger ones. “The pain train is departing Main Street and heading for Wall Street.”
If the Federal Reserve is hoping for the labor market to give sometime soon, Tuesday’s economic data is evidence that more work is left to be done. Job openings increased to 9.61 million in August from 8.92 million a month earlier.
As investors wrestle with the prospect of higher rates, Cleveland Fed President Loretta Mester said Tuesday she would support another 25 basis point hike at the central bank’s November meeting if the economy looks similar to how it did at the time of the Fed’s September meeting.
“The market seems extremely skittish at the moment given rate volatility, hawkish Fed rhetoric and a hot JOLTS number,” said Jack Parker, associate portfolio manager on the global fixed income team at Brandywine Global Investment Management.
Speculative-grade borrowers are also feeling the pain from the turn in credit sentiment. Junk-bond spreads are the highest since the end of June, hovering at just over 400 basis points, according to data compiled by Bloomberg. Yields have surged above 9% as Treasury rates spike higher.
The cost to insure against default against both investment grade and junk debt defaults has climbed as well, with the price of the Markit CDX North American High-Yield Index, which declines as credit conditions tighten, falling as much as 0.771 cent to 99.763 cents Tuesday.
“Headlines focused on elevated expected defaults might spook some investors, but there are plenty of high quality credits trading at historically high yields with management teams focused on debt repayment and managing their interest coverage with materially higher borrowing costs,” Parker said.
–With assistance from Ethan M Steinberg.
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