Credit Risk Gauge Eases as Fed Cuts for First Time in Four Years
(Bloomberg) -- A key measure of perceived risk in the US corporate bond market edged lower Wednesday after the Federal Open Market Committee cut interest rates as it pursues a rare soft landing for the US economy.
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The spread on the Markit CDX North American Investment Grade Index, which declines as credit risk decreases, tightened more than 1 basis point to its tightest level in two months and to hover around its narrowest since the pandemic.
The market pared back most of its gains after Fed Chair Jerome Powell cautioned against assuming big rate cuts would continue and investors further digested the decision. For corporate bonds, lower rates could spur investors to buy bonds, to lock in yields before they fall further, but could also push more companies to sell debt, potentially weighing on valuations.
“We’re telling clients ‘just get into the bond market,’ just get into a general bond fund,” Bob Michele, chief investment officer and head of global fixed income at JPMorgan Asset Management, said on Bloomberg TV. “Yields are coming down.”
Companies have sold more than $1.2 trillion of high-grade corporate bonds this year, up nearly 30% from the same point in 2023. Wednesday’s cut is likely to encourage more companies to sell debt to take advantage of lower yields, according to Andrzej Skiba, head of BlueBay US fixed income at RBC Global Asset Management.
Investors have broadly been bracing for corporate debt sales to slow down in the weeks before the US presidential election, because that contest could potentially push inflation fears higher and boost bond yields. But money managers might not be giving enough weight to the potential impact of lower yields on company borrowing, Skiba said.
“The idea of primary issuance slowing down in the second half of the year can finally be put to rest because we expect a fair amount of supply, taking advantage of the rallying government bond yields and opportunistic issuance to come towards our space,” Skiba said. “The lower the yields, the more issuance.”
The high-yield CDX index, which trades on price, rose almost 0.3 cent on the dollar, before giving back much of its gains.
“We think this rate drop is very supportive for high yield and could provide a sanguine backdrop for refinancings later this year and into 2025,” said Hunter Hayes, chief investment officer at Intrepid Capital Management and a co-lead portfolio manager of the Intrepid Income Fund.
(Updates to add comment from Powell in third paragraph. A previous version of this story corrected the price in second-to-last paragraph.)
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