A gauge of perceived risk in US corporate credit markets spiked by 7.4 basis points to 65.657 basis points. — Bloomberg
NEW YORK: Globally, key credit risk measures surged amid growing concerns about weakening economic growth. Expected to be among the busiest days of the year, the turmoil effectively shut down US company bond sales on Monday.
A gauge of perceived risk in US corporate credit markets spiked by 7.4 basis points to 65.657 basis points.
Monday was the biggest one-day climb since March 2023, after Silicon Valley Bank collapsed. In Europe, the story was similar, with the region’s credit default swap indexes surging, reflecting a greater perceived risk of companies defaulting.
Blue-chip companies that were looking to sell bonds in the United States on Monday stood down amid the turmoil, according to debt underwriters.
This would mark only the second Monday this year without any sales of investment-grade bonds, excluding holidays.
With approximately 10 sales anticipated, it would have been one of the busiest sessions of 2024 in terms of the number of offerings.
Late last week, Wall Street syndicate desks expected about US$40bil of US investment-grade bond sales this week, with about half the sales projected for Monday.
It’s unclear when those sales will happen. In the leveraged loan market, SBA Communications Corp on Monday postponed the repricing of a US$2.3bil loan slated to wrap up this week.
Corporate debt faces multiple headwinds now. Last Friday’s US jobs report implied that hiring is slowing faster than previously expected, raising recession concerns.
Any economic weakness could make it harder for companies to pay their bills.
Furthermore, economists now anticipate a more aggressive rate cut from the Federal Reserve (Fed), potentially lowering borrowing costs for companies and increasing debt sales.
Whenever treasury markets settle down and companies resume selling debt, the sales volume could be heavy, weakening corporate debt prices relative to treasury bonds.
The upshot is that corporate bond prices will keep climbing, joining in a broader fixed-income rally as investors prepare for interest rates to fall.
Credit products, on the other hand, will likely lag treasuries as money managers demand higher yields relative to government debt to compensate for default risk, pushing spreads further.
“The downside can be massive from these levels,” said Michael Contopoulos, director of fixed-income at Richard Bernstein Advisors. “We anticipate that spreads will continue to widen.”
In the leveraged loan market, commitments are due for more than 15 deals this week, including a handful of dividend deals and one acquisition. It’s unclear if the SBA’s delays will also affect other deals.
In Europe, an index that tracks credit default swaps for junk-rated companies has jumped by the most since March 2023, when Credit Suisse collapsed.
Traders and a Bloomberg index predicted the biggest surge in yield premiums for high-grade US dollar bonds in Asia, with a credit derivatives gauge reaching its highest level since May.
The moves follow other asset classes in the throes of a wild correction, with a global stock rout still raging and a Wall Street stock market fear gauge, the CBOE Volatility Index, soaring to the highest since 2020.
The concern is that the Fed has been behind the curve on rate cuts, and the world’s richest economy could be heading for a recession as a result.
The timing of all this, however, is crucial because of the thin volumes that are typical throughout August.
In addition to coming to terms with the realities of an economic slowdown, “investors will also need to integrate uncertainty coming from the Middle East, with the risk of a broader war looming in the background”, said Raphael Thuin, head of capital market strategies at French asset manager Tikehau Capital.
“This is a lot to digest for August, at a time of tight spreads coming after an extended period of strong performance.”
Investors chased higher yields for the majority of the year, putting recession fears on hold despite perceived credit risk drifting higher.
The default rate for Bloomberg’s European junk index climbed to 2.96%, crossing the Covid era’s 1.8%.
The latest gyrations suggest a turning point if concerns about a worse-than-expected US slowdown and spillover effects deepen.
“The market was overdue for a correction and there was too little differentiation between cyclical and non-cyclical credits,” said Thomas Leys, an investment director at Abrdn. “But no one expected such a sharp reaction.”
On Sunday, Goldman Sachs Group Inc economists increased the probability of a US recession in the next year to 25% from 15%, while also adding that there are reasons not to fear a slump, even after unemployment jumped.
The economists expect the US central bank will reduce rates by 25 basis points in September, November and December.
“The current risk-off in credit will peter out,” predicted Bloomberg Intelligence chief European credit strategist Mahesh Bhimalingam.
“Credit metrics and quality are still quite solid and the measures the central bank puts in place will soon be in action.” — Bloomberg
