Corporate bonds

Ugly days for corporate bonds are buying time for Wall Street

(Bloomberg) – Federal Reserve rate hikes look set to make things more difficult for credit markets, and U.S. corporate bonds are off to a rocky start to 2022 in anticipation of that.

But some Wall Street strategists believe those fears have escalated, creating a buying opportunity in parts of the high-end market.

U.S. investment-grade bond yield spreads rose six basis points last week and are at the widest level since November 2020, while only two investment-grade issuers braved the volatility to sell new bonds. The Markit CDX North American Investment Grade Index, a basket of credit default swaps that serves as an indicator of credit risk, also hit its highest levels in more than a year.

A faster-than-expected Fed rate-hike campaign could add to investors’ pain. And if the relatively strong bond issuance forecast materializes, that could also happen.

Yet while US corporate credit is “vulnerable”, BNP Paribas SA strategists led by Viktor Hjort wrote in a note dated Friday, “short-term conditions are oversold.”

The bank sees the current selloff as an opportunity to add defensive credit positions that could perform well as central banks scale back stimulus in the months ahead. These include US financial sector bonds, Hjort wrote.

At JPMorgan Chase & Co., strategists see potential for increased demand for credit as investors eye lower valuations.

“It’s safe to say that valuations have reset slightly and could reach levels that are starting to attract more institutional investors,” Eric Beinstein, head of US investment grade credit research at the bank, wrote on Monday.

Elsewhere in credit markets:

Americas

Union offices expect high-quality issuers to borrow up to $20 billion this week, but they may have to look for windows to move forward with deals if volatility persists.

  • Three borrowers tap the U.S. investment-grade market with further bond sales on Monday
  • Prince International sells approximately $1.25 billion of high-yield bonds in a two-part transaction that will be used for its acquisition of Ferro
  • Covis Pharmaceuticals has cut a planned debt offering originally slated to cost $350 million on Friday from $850 million, eliminating the US dollar portion in favor of a loan
  • U.S. Bankruptcy Judge James Garrity on Friday approved onerous settlements between Latam Airlines Group SA and some of its biggest aircraft leasing creditors

EMEA

At least 10 deals hit major European bond markets, generating more than 7 billion euros ($7.9 billion) in issuance on the first day of the week.

  • Thursday’s BoE and ECB interest rate decisions, coupled with continued earnings blackouts, could dampen publicly syndicated activity this week, according to a Bloomberg survey
  • Sales of bonds with sustainable objectives have increased sevenfold in Europe this month, competing with green debt to become the dominant force in the ethical market
  • Italian drilling firm Saipem’s euro bond due July 2026 fell 6.4 cents on the euro to 91.2 cents, after issuing a profit warning on Monday
  • Bondholders of online directory and digital marketing company Yell are expected to take over the business after reaching an agreement on a restructuring of its capital structure over the weekend, according to a statement.

Asia

New issuance of Asian dollar bonds halted on Monday as some markets, including mainland China, were closed for the Lunar New Year holiday.

  • Investment-grade Asian dollar bonds are on track for their worst monthly performance since March 2020, but are still doing better than their US counterparts
  • Stressed out developers in China face a significantly lower bill for bond payments in February compared to this month, but concerns continue to swirl over the sector’s ability to raise funds
  • Supermarket operator Future Retail Ltd., one of India’s best-known companies to have struggled financially during the pandemic, is banking on the country’s highest court to prevent it from defaulting on payment of a debt of 35 billion rupees ($467 million)
  • Chinese group Aoyuan’s dollar bonds were reported higher earlier on Monday, with some poised for their biggest gains since November, after Cailian announced a Shandong state-owned company could become the shareholder majority of the Chinese developer.

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