Some corporate bond issuers are expected to delay sales this week, after market volatility caused investors to trim corporate bond holdings in favor of safer U.S. Treasuries, according to bond market participants.
Weaker-than-expected employment and manufacturing growth data last week have stoked recession fears, hitting stocks and causing investors to seek safety in U.S. government debt.
That has pushed down Treasury yields, which move inversely to prices, and caused corporate bond spreads over Treasuries to reach their widest level since January.
No investment-grade or junk bond deals priced on Monday, according to International Financing Review data, the 13th day this year without a deal outside a Friday or a holiday.
Market participants expect this week’s pipeline to comprise higher-quality names which investors deem relatively safe, while riskier issuers will likely hold off until spread volatility subsides.
Utility sector issuers made up the majority of high-grade bond offerings on Tuesday, including a $300 million 10-year first mortgage bond by Connecticut Light and Power.
“The recent equity and credit market volatility won’t eliminate the pipeline altogether, but it will have an impact,” said Chris Forshner, head of investment grade finance at BNP Paribas.
“The issuers that will be most impacted are those that ... need a very solid backdrop from which to sell new-issue bonds.”
Junk spreads - the premium investors demand to hold riskier, low-rated debt over Treasuries – rose to 393 basis points on Monday, the widest since November 2023, according to the ICE BofA U.S. High Yield Index.
Spreads for high-grade corporate bonds surged to 112 basis points on Monday, their highest since December, the ICE BofA U.S. Investment Grade Corporate Bond Index showed.
The moves followed a credit market rally through most of the year, as optimism around the U.S. economy despite high interest rates sent investors hunting for yields.
Just two weeks ago, junk spreads hit their lowest level since December 2021, while high-grade spreads have also been contained this year, remaining well below 2023 levels.
Still, the corporate bond sell-off has been milder than for other risk assets such as stocks, and some investors bought back into corporate bonds on Monday after trimming exposure earlier in the year in favor of high-yielding assets.
Dan Krieter, director of fixed income strategy at BMO Capital Markets, noted on Tuesday that buying made up 54% of BMO clients’ activity in the high-grade market on Monday, the highest daily share since mid-June.
“They are better value now than they were,” said Andrew Jackson, head of fixed income at Vontobel. “Having taken quite a lot of risk out of our positions, we’re now adding at the margin risk on the credit side.”
Selling pressure by volatility-linked funds that exacerbated losses in U.S. stocks over recent days may be on track to ease, analysts said.
Volatility-linked strategies, including volatility control funds and equities trend-following commodity trading advisers (CTAs) control funds, are systematic investment strategies that typically buy equities when markets are calm and sell when they grow turbulent. They became heavy sellers of stocks over the last few weeks, exacerbating a market rout brought on by economic worries and the unwind of a massive global carry trade.
Monday’s selloff, during which the S&P 500 fell 3%, saw the strategies offload some $70 billion worth of stocks, according to estimates from options research provider Tier 1 Alpha. The move came as the Cboe Volatility Index notched its biggest intra-day rise on record and closed at its highest level since Oct 2020.
In aggregate, the funds have sold $150 billion over the last three weeks, according to Tier 1 Alpha estimates.
However, the fastest-reacting strategies, including volatility control funds and equities trend-following commodity trading advisers (CTAs), may have lightened up their exposure enough to ease up on the selling pace.
“These balancing requirements typically resolve over the course of a couple of days max,” said Craig Peterson, CEO of Tier 1 Alpha. “I wouldn’t expect this to bleed into the end of the month necessarily unless we see a lot more weakness.”
The S&P 500 was up more than 2% on Tuesday afternoon.
Comments