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Investors in the U.S. bond market is grappling with extreme volatility and growing recession anxiety as recent developments in the financial markets have led to significant fluctuations. A sudden upheaval in currency markets and concerns over the U.S. economy have intensified these worries, particularly affecting riskier corporate bonds.
In the last week, U.S. corporate bonds with “junk” credit ratings saw all their gains from earlier this year wiped out. High-yield corporate bonds experienced a sharp increase in spreads, jumping by about 80 basis points to over 370 basis points above risk-free Treasuries. The volatility was further heightened by a disappointing U.S. jobs report, which drove the unemployment rate to 4.3%, the highest in three years, triggering the Sahm rule, an important recession signal.
The uncertainty in the bond market coincided with a violent selloff in global equity markets on Monday, driven by the unravelling of the popular Japanese yen “carry trade.” This led to an explosion of volatility, causing a temporary pause in new corporate borrowing. However, by Tuesday, several major U.S. companies, including Toyota Motor Corp., resumed activity in the corporate bond market, seeking to raise approximately $5 billion through the issuance of 10 tranches of bonds.
Despite the turmoil, some high-quality companies are cautiously returning to the bond market. George Catrambone, head of fixed-income at DWS, noted that while the investment-grade markets are “back open for business,” borrowers are expected to pay slightly higher new-issue concessions. The recent sharp repricing of the $27 trillion Treasury market, with the 10-year Treasury yield at 3.88%, also has significant implications for borrowers and the broader economy.
As the Federal Reserve’s interest rate hikes continue to impact the market, both high-yield and investment-grade companies are carefully approaching new debt issuance. Investors and market participants will need to closely monitor developments in the coming weeks, especially as the possibility of Fed rate cuts looms and the broader economic outlook remains uncertain.