Global credit markets have started to show signs of caution, as investors pull back from treating the asset class as a safe haven following record borrowings and growing concerns about balance sheets as inflation persists. Spreads on global corporate bonds have blown out about 5 basis points this week, the most since March, leaving them at their widest in half a year, according to a Bloomberg index. Trading at the start of the global day in Asia on Friday pointed toward more selling, with yield premiums on investment-grade notes increasing 2 to 4 basis points, traders said.
The weakness in credit contrasts with gains in Treasuries after mostly dovish comments from Federal Reserve officials. The divergence stands out. Credit has held up well in the past year even when sovereign debt was slumping, prompting many investors to take the view that some companies are safer bets than even the most powerful governments. But record bond sales recently from Paramount Skydance Corp. to Soft Bank Group Corp. have added to a surge in supply of corporate debt that's now giving money managers pause.
"It's that choppiness that keeps people away from the market," said Sheldon Chan, a portfolio manager for Asian and Emerging market credit at T. Rowe Price Group. While credit markets remain at historically stronger levels despite the stumbles in recent weeks, a number of signals are showing growing investor caution. After Paramount Skydance Corp. issued $52 billion of debt this week to fund the biggest Hollywood buyout ever, its junk notes were among the hardest hit in initial trading. That came just days after Soft Bank pushed through a $11.1 billion junk debt deal for which it had to pay record yields, including 9.75% on a 7.5-year bond, in an effort to fund its massive AI ambitions.
"The bigger question is where do things go from here. It's down to the macro and economic setup," Chan said. The longer term view in the US is more uncertain, given economic growth is still good, he said. "There could be more upward pressure on US rates going forward." Elsewhere in the riskier parts of the US debt market, spreads jumped above 1,000 basis points over Treasuries for the first time since the regional banking crisis in 2023. That follows a steady rise since April as investors began to anticipate the Fed's next rate hike.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing