US corporate bond spreads experienced a notable expansion on Tuesday, with an average increase of two basis points (bps), as indicated by the ICE BofA Index Option-Adjusted Spread, now resting at 128 bps over U.S. Treasuries. The ICE BofA High Yield Index Option-Adjusted Spread also saw an uptick, widening by 15 bps to 426 bps. This development follows a streak of seven consecutive sessions during which spreads extended by nine to 10 bps.
The widening of these US corporate bond spreads can be linked to Tuesday’s release of August’s Job Openings and Labor Turnover Survey (JOLTS) data. The report revealed the highest number of job openings in the United States in two years. This confirmation aligned with the expectations of numerous investors, who anticipate prolonged higher U.S. interest rates and an impending economic downturn.
Throughout this week, the U.S. 10-year Treasury note yield surged by 20 bps, arriving at 4.8%. Notably, the U.S. 30-year Treasury yield reached 5% for the first time since 2007 on Wednesday. These shifts have been attributed to escalating government borrowing costs and the Federal Reserve’s commitment to higher interest rates over an extended period, prompting investors to adopt a more defensive stance toward U.S. corporate bonds.
According to research conducted by JPMorgan, high yield bond funds witnessed substantial outflows, amounting to $816 million on Tuesday, following a similar trend of $717 million outflows the preceding day. Remarkably, no new junk debt was issued on Tuesday. Blair Shwedo, the Head of Fixed Income Sales and Trading at U.S. Bank, remarked, “With longer dated Treasury yields up more than 50 bps in less than a month, the market continues to show caution around adding risk until a new equilibrium in rates has been reached.”
Dan Krieter, the Head of Fixed Income Strategy at BMO Capital Markets, highlighted that, “if rates continue to move higher or simply remain at these elevated levels for a significant period of time, it is going to have a pronounced effect on the credit worthiness of corporate borrowers, particularly in the high yield space.”
This situation portends further widening of U.S. corporate bond spreads, potentially leading to inflation and deterring investment in riskier bonds. The recent widening is expected to persist following the release of the jobs data, reinforcing the belief among investors of extended higher U.S. interest rates and an imminent economic downturn.
In light of these developments, market participants are closely monitoring the evolving economic landscape, seeking to adapt strategies in response to the shifting bond market conditions. As US corporate bond spreads continue to fluctuate, industry experts remain vigilant for signs of a new equilibrium in rates that may bring about stability in the market.