Corporate bonds are a warning sign for investors to stay cautious

Corporate bonds are a warning sign for investors to stay cautious

Some investors who are worried that the Federal Reserve's campaign to tame inflation is putting pressure on stocks might want to look at corporate bonds.

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Money managers will be watching risk premiums across US credit markets next week as levels closer to what they point to as a warning of stress.

Spread levels above 150 basis points is where many market participants think the Fed may be worried that its quantitative tightening plan is putting too much strain on corporate-debt markets, Bloomberg News previously reported. For the most part, risk premiums have remained below that mark for much of the last decade except during periods of market stress such as the 2016 oil crash and the Pandemic.

We are in a kind of the approach to the danger zone, 150 basis points of spread. If you break to 200, that is when the Fed has to take a pause and say, Are capital markets still functioning? Winifred Cisar, global head of credit strategy at CreditSights Inc., told Bloomberg Television on Tuesday.

A similar warning sign is being flashed in the junk-debt market as spreads on the riskiest tier of bonds move dangerously close to 1,000 basis points, which would be considered a distressed level.

The investors will get insight into the US central bank's tightening path after a fresh batch of minutes from the most recent Fed rate-setting meeting.

Bond-issuers that are expected to report earnings next week are Macy s Inc., Gap Inc. and Costco Wholesale Corp. Retail companies are in focus after weak outlooks from Target Corp. and Walmart Inc. have sent stock and bond prices plummeted.

Bloomberg strategist Michael Gambale wrote that the US high-grade bond syndicate desks will look to the US next week for some stability in the financial markets. At the end of the week, debt sales stalled due to market volatility and risk-off sentiment. He said companies that stood down on expected deals will likely look again over the next few days if the issuance backdrop improves.

Leverage finance markets are sitting at a virtual standstill. In May, only two junk bonds have been priced in the US high-yield bond market. Commitments are due to two leveraged-loan deals, while a handful of other potential sales are past due, including Mallinckrodt's $900 million term loan that will in part help fund its exit from bankruptcy.

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