Russia-Ukraine volatility hits hard already hammered U.S. credit

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FILE PHOTO: U.S. dollar notes are seen in this picture illustration

By Davide Barbuscia

NEW YORK – U.S. credit markets have been churning with more volatility spurred by Russia’s invasion of Ukraine, on top of uncertainty around monetary policy shifts, hurting investor returns and complicating borrowers’ ability to access financing.

Concerns that the U.S. Federal Reserve may hike rates too aggressively, increasing borrowers’ cost of funding, have weighed on the corporate bond market this year.

That weakness worsened this week as Russia invaded Ukraine, pushing markets into risk-off mode and widening spreads – the interest rate premium that investors demand to hold corporate debt over safer U.S. Treasuries.

On Thursday, the yield spread on the ICE BofA U.S. High Yield Index, a commonly used benchmark for the junk bond market, jumped 5.7% to 393 basis points, hitting its highest since January last year.

“The escalation of the Russia-Ukraine conflict adds to the (already long) list of uncertainties, including inflation and the future path of monetary policy, that have been weighing on credit spreads in recent months”, Barclays strategists Bradley Rogoff and Dominique Toublan said in a research note this week.

“As such, we expect spreads to remain under pressure and choppy”, they said.

Wild price swings have kept a lid on new debt issuance from high-yield borrowers this year, and this week only one deal priced for $1 billion in the U.S. high-yield market, Deutsche Bank strategist Craig Nicol said in a research note on Friday.

That means year-to-date supply of new U.S. dollar-denominated high-yield bonds is at $38.9 billion, which is down 55% year on year. The euro primary market was shut all week, leaving year-to-date supply down 57% year on year, he said.

“Whilst the rally in rates has helped to somewhat offset the damage to returns, the magnitude of spread widening has still resulted in a -0.4% total return for $HY this week”, Nicol said.

U.S. investment grade corporate debt could become more sensitive to global macro risks than high-yield debt, the Barclays strategists said, because investment grade companies tend to be more global while high-yield credit is more domestically focused.

The yield indicated on the ICE BofA U.S. corporate index, which tracks dollar denominated investment grade rated corporate debt, jumped 6.5% on Thursday.

(Reporting by Davide Barbuscia; Editing by David Gregorio)

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