(Bloomberg) — US corporate bonds outperformed stocks and other markets last week. Some Wall Street firms wonder how long that can last.
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Risk premiums for high-grade US corporate notes widened just 0.01 percentage point last week, according to Bloomberg index data, even as stocks fell more than 4.7%. The Federal Reserve is likely to hike rates this week, and probably won’t hint at the possibility of slowing its tightening, which is one of the reasons there’s a “more cautious backdrop” for investment-grade notes this week, JPMorgan Chase & Co. strategists led by Eric Beinstein wrote on Monday.
Issuers seem cautious about the market now. Four potential high-grade borrowers looked at selling bonds this morning, but ultimately opted to stand down amid a volatile start to trading that later stabilized. Supply is now running well below forecasts for September, with rapidly rising yields derailing some issuers’ plans. And last week, Oracle Corp. said it borrowed $4.4 billion in the term loan market, which may mean it has to sell fewer corporate bonds to help finance its acquisition of Cerner Corp.
Last week’s higher-than-expected consumer price index means the Fed is likely to keep hiking rates aggressively for longer, a negative for credit, according to strategists at Barclays Plc. Those expectations are leading to much higher real interest rates. When real rates rise at the same time economic growth falls below trend, credit spreads tend to widen, Barclays strategist Brad Rogoff wrote in a report Friday. Meanwhile, strong credit fundamentals have likely peaked, according to the report.
“Altogether, we believe that tighter financing conditions alongside mediocre economic growth and weakening credit fundamentals should lead to materially wider spreads,” Rogoff wrote.
Derivatives are also showing concern. The spread on the Markit CDX North American Investment-Grade Index is about 10 basis points higher since last Monday, a sign that at least some in the market are bracing for wider spreads.
Elsewhere in credit markets:
Americas
A Barclays Plc-led group of banks launched a $1.87 billion high-yield bond to help finance Brightspeed’s acquisition by Apollo Global Management Inc
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There’s an investor call for the seven-year notes at 11 a.m. New York time on Tuesday, while a lender call for a $2 billion loan that will also support the deal was scheduled for Monday
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A group of banks led by Credit Suisse Group AG is offering a steeper discounted price of 84.62 cents cents on the dollar to 85.695 cents on a $4 billion secured bond to help fund the buyout of Citrix Systems Inc., lowered from earlier pricing discussions of 88 to 90 cents on the dollar
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Mattel entered into a new $1.4 billion revolving credit agreement
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Puerto Rico’s bankrupt power utility and bondholders may face off in court Wednesday in the wake of Hurricane Fiona’s damage after mediation talks over the agency’s $9 billion debt restructuring ended last week without a deal.
Europe
Two deals were offered in Europe’s primary market on Monday.
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Exchanges were closed in the UK on Monday for the Queen’s funeral
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European Central Bank Governing Council member Francois Villeroy de Galhau signaled he may support lower bank contributions to a fund for winding down troubled European lenders, a change the finance industry has long lobbied for
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A widely anticipated jump in borrowing costs for the Swedish real-estate sector has become a reality for NP3 Fastigheter AB, one of the country’s biggest listed property companies
Asia
Asia’s primary dollar bond market had a slow start to the week, with a dearth of new deals indicating widespread caution ahead of Federal Reserve’s policy decision on Wednesday.
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Exchanges in Japan were closed for a holiday Monday.
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Financial contagion has spread so far across China’s property industry that even state-backed developers are at risk of surging defaults, according to Citigroup Inc. analysts
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Source: finance.yahoo.com
