(Bloomberg) - US investment-grade corporate bond spreads have breached a key 150 basis point threshold that analysts and investors say could start to disrupt the flow of credit.
The figure, which measures the extra yield investors demand to own corporate bonds instead of US Treasuries, is the highest in two years, according to data compiled by Bloomberg.
Spreads recovered after the Federal Reserve took the unprecedented step of purchasing corporate bonds to boost liquidity around that time, but are coming under pressure again amid concerns about a potential recession.
While the central bank has so far shown little sign of slowing its pace of interest-rate hikes, spreads are moving toward a point where officials could begin to face pressure over the path of policy tightening, according to Winifred Cisar, global head of credit strategy at CreditSights Inc.
“Historically, investment grade spreads tend to trade to 150 basis points, and then break wider,” Cisar said in an interview last month. “And we found that in only a handful of periods where IG hit 150 did spreads tighten from there without going to very distressed levels. So, 150 has generally been this signal that we’re kind of approaching a broader market swoon effectively.”
High-grade spreads jumped 3 basis points Tuesday to 151 basis points, according to Bloomberg index data. Spreads on speculative-grade bonds climbed 19 basis points to 521 basis points -- having broken above the key 500 basis points mark earlier this month -- while the average price on leveraged loans slid to 93.02 cents on the dollar. The sell-off has brought the market for new high-yield bond and loan sales to a virtual halt in recent weeks.
Investment-grade issuance may slow in the second half of the year, Cisar said. Many of the companies driving issuance, including financials, historically issue more in the first few months of the year and then stall throughout the rest. Mergers and acquisitions funding which has already been light because of broader market volatility, she added, will also slow.
“The combination of those factors should have new issue decelerate relative to where we are currently,” Cisar said.
Should risk premiums continue to gap out credit markets could even seize up, according to analysts and investors informally polled by Bloomberg. The metric has proved a reliable red flag in the past after crossing 2 percentage points in the volatile years after the global financial crisis and during the pandemic fallout.
By Josyana Joshua
