(Bloomberg) -- Investors dumped risk assets during Russia's invasion of Ukraine but they found a haven in junk.
U.S. high-yield corporate bonds rallied over the last week, thrashing investment-grade, which is much more susceptible to rising rates. Strategists expect the debt to continue to do well, even as higher-rated bonds sell off.
“Relative to other global risk markets, the U.S. dollar high-yield market issuer base is relatively insulated from the Russia-Ukraine war,” said Jeremy Burton, high-yield portfolio manager at PineBridge Investments. “It's overwhelmingly a mid-cap market, dominated by companies who don't have a massive global presence, and also over-indexed to energy, giving it a hedge against rising energy prices.”
UBS strategists led by Matthew Mish say U.S. high-yield debt is well positioned to ride out volatility caused by Russia's invasion of Ukraine. They recommend buying B rated bonds and junk debt from the financial and communications sectors. They also advise being underweight consumer cyclical and non-cyclical bonds.
“High yield remains fundamentally solid,” the UBS strategists wrote. “Systemic risks appear contained.”
To be sure, junk is not immune to global volatility and tends to trade lower when equity markets drop. And there's a danger that global investors with Russia or Ukraine exposure will have to sell U.S. credit to raise liquidity and cover outflows, according to UBS.
There are also risks to economic growth if the war drags on, which would knock credit across the board.
“High yield in the U.S. has benefited from the large energy exposure and relatively shorter duration, as well as the presumption that the economy remains healthy,” said Noel Hebert, director of credit research at Bloomberg Intelligence. “If or when the switch is flipped, it's liable to get ugly quick,” he said.
Elsewhere in credit markets:
Americas
Nine issuers sold new U.S. investment-grade bonds Thursday, seizing on a second day of relative calm after a 16-deal spree in the previous session.
- Honda Motor Co. is selling bonds meant to benefit the environment for the first time, joining its competitor Ford Motor Co. in tapping the booming world of sustainable finance to fund a transition to electric vehicles
- Timothy O'Hara, global co-head of credit at BlackRock Inc., is set to leave the world's largest asset manager after five years helping to build its alternative investments business
- For deal updates, click here for the New Issue Monitor
- For more, click here for the Credit Daybook Americas
EMEA
Corporate issuers returned to Europe's primary market for the first time in a week with deals from a U.S. medical-device firm and U.K. super-sewer construction company.
- The week's total of 15.95 billion euros ($17.6 billion) equivalent is in line with 57% of respondents to the most recent Bloomberg survey who had expected sales to fall in the 15 billion to 20 billion euro range
- Banks have lined up around 815 million pounds of debt financing to back Apollo Global Management Inc.'s acquisition of U.K. homebuilder Miller Homes Group Ltd
- ING Groep NV joined a flurry of European banks calling CoCo bonds
Asia
Stresses in China's property market continued to play out Thursday, with a dollar bond from Redsun Properties Group Ltd. due next month falling.
- Chinese developer Shimao Group Holdings Ltd.'s credit rating has been slashed deeper into junk by Fitch Ratings amid growing concern about the beleaguered firm's financial health
- Asian markets such as India and Indonesia will be potential beneficiaries of EM corporate dollar-bond reallocation if Russia is removed from indexes, said Barclays Plc credit analyst Avanti Save
- A leasing unit of collapsed Chinese conglomerate HNA Group Co. has missed payment on a local bond for the first time after spending months negotiating extensions with creditors to stave off a delinquency
- The past year's outperformance for Indian local corporate bonds versus Asian dollar notes is fading amid inflation risks
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