US corporate credit spreads around the ‘danger zone’

(Bloomberg) – Investors who are worried that the Federal Reserve’s inflation control campaign is putting pressure on stocks may want to take a closer look at corporate bonds.

Most read from Bloomberg

Money managers will see risk premiums across the U.S. credit market next week as strategists are close to an inch closer to what they have pointed out as a pressure warning signal.

Spread levels above 150 basis points where many market participants say the Fed may be concerned that its quantitative tightening plan is putting too much pressure on corporate-debt markets, Bloomberg News previously reported. With the exception of market pressures such as the epidemic and the 2016 oil disaster, the risk premium has, for the most part, remained below that mark for most of the last decade.

“We are in danger zone, 150 basis points spread. If you break the 200, the Fed will have to take a break and say, “Is the capital market still working?”

At the same time, a similar warning sign is emerging in the junk-debt market as the spread on the risky level of the bond dangerously moves closer to 1,000 basis points – which would be considered a crash level.

Investors will analyze through a new batch of minutes from the most recent Fed rate-setting meeting, which could help provide market insights as the US Federal Reserve tightens.

Macy’s Inc., Gap Inc. And Costco Wholesale Corporation is among the bond-issuers who will report earnings next week. Target Corporation and Walmart Inc.’s weak outlook will keep retailers focused as stock and bond prices fall.

Sales pipeline

The U.S. High-Grade Bond Syndicate Desk will “look to next week for some stability in the financial markets,” wrote Bloomberg strategist Michael Gamble. Debt sales closed at the end of the week amid widespread market volatility and risk-free attitude. The companies that stood in the expected deal will probably show up again in the next few days, he said, if the background of the issue improves.

The leverage finance market, meanwhile, has come to a virtual standstill. Only two junk bonds were priced in May in the U.S. high-yield bond market. There is currently no contract in the pipeline.

There are promises for two leveraged-loan deals, while a handful of other potential sales have ended, including Mallinckrodt’s $ 900 million term loan that will help finance partial bankruptcy.

Most read from Bloomberg Business Week

© 2022 Bloomberg LP

Leave a Reply

Your email address will not be published.