Business

Investors brace for chaos in US corporate bond market

Investors have flocked to the derivatives market to protect their corporate bond portfolios from a potential sell-off, as they face a growing risk that the recent drop in share prices will infect spread to corporate debt.

Trading on a widely used index of undervalued credit default swaps, which allows investors to exercise protection from companies defaulting on their debt, has increased to $197 billion in January, up from $123 billion in December and the highest since March 2020, according to International Swaps and Derivatives Association data.

“The market is a lot more nervous than it was at the start of the year,” said Viktor Hjort, head of global credit strategy at BNP Paribas.

Investors worry that higher inflation is leading to a period of Federal Reserve policy tightening, pushing up interest rates and appreciating riskier valuations of bonds and stocks.

Column chart of Transaction (billion dollars) portfolio showing Investors rushing to hedge bond portfolios with derivatives

So far, the corporate bond market has remained relatively calm as stocks have sold off this year. The yield differential between risky junk bonds and U.S. Treasuries has yet to cross the level in December, when fears of Omicron heightened, according to Ice Data Services. However, activity in the derivatives market suggests that beneath the surface, investors are giving themselves to the possibility that larger cracks could still emerge in credit.

Hjort said he believes the credit cycle has changed, meaning the positive economic backdrop will no longer be in favor of corporate bond investors. Continued economic growth will encourage the Fed tightening monetary policy and push companies into shareholder-friendly practices like mergers and capital expenditures, Hjort argues, both of which have the potential to affect corporate bond prices.

As with the CDS indexes, investors have turned to credit options, where expiring contracts – used to protect investors from a potential short-term drop in prices – have boosted prices. treat. “It’s a sign of serious risk aversion,” says Hjort.

Some of the biggest exchange-traded funds that track corporate bonds have also seen increased short-selling activity, according to data from Markit, a bet that would also be successful if the price is priced in, according to data from Markit. reduction. Several bank traders said they have seen clients switch hedging from the stock market to the credit market.

In another bearish sign, funds that buy high-yield US bonds have suffered an outflow for four straight weeks, bringing year-to-date withdrawals close to $11 billion. On January 18, investors withdrew $1.3 billion from the widely-followed high-yield exchange-traded fund — known under the ticker HYG — marking the largest single-day outflow since from February 2020, according to Bloomberg data.

Fund Flow (USD billion) column chart showing Investors withdrawing money from US high yield bonds

Ion Analytics pulled a bond deal from the market in January citing volatile market conditions, according to people familiar with the deal, highlighting a sense of anxiety in the market.

“We don’t see that often,” said one credit investor briefed on the deal. “It’s a sign that money is running low in search of things to buy.”

The net positioning in the credit default swaps indexes – the difference between buy and sell – has moved markedly to investors’ lack of ability to hedge against the downside.

“It signals that more people are cutting risk and adding hedging measures,” said Calvin Vinitwatanakhun, strategist at Citi.

Source link

news7h

News7h: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, Sports...at the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button