Federal Reserve rate hikes look poised to make things harder for credit markets, and U.S. corporate bonds are off to a rocky start to 2022 in anticipation of that.
But some Wall Street strategists believe those fears have gotten overheated, creating a buying opportunity in certain parts of the high-grade market.
U.S. investment-grade bond spreads rose six basis points last week and sit at the widest level since November 2020, while just two high-grade issuers braved the volatility to sell new bonds. The Markit CDX North American Investment Grade Index, a basket of credit default swaps that serves as a gauge of credit risk, has spiked to its highest levels in more than a year as well.
A faster-than-expected campaign of Fed rate hikes could further the pain for investors. And if forecasts for relatively strong bond issuance come to fruition, that could, too.
Still, while U.S. corporate credit is “vulnerable,” BNP Paribas SA strategists led by Viktor Hjort wrote in a note dated Friday, “near-term conditions are oversold.”
The bank sees the current selloff as an opportunity to add defensive credit positions that could perform well as central banks reduce stimulus in the coming months. Those include U.S. financial sector bonds, Hjort wrote.
At JPMorgan Chase & Co., strategists see potential for credit demand to rise as investors eye cheaper valuations.
“Arguably valuations have reset a fair bit and may be at levels that begin to entice more institutional investors,” Eric Beinstein, the bank’s head of U.S. high-grade credit research, wrote Monday.
This article was provided by Bloomberg News.