Ugly Days for Corporate Bonds Are Time to Buy for Wall Street

(Bloomberg) -- 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.”

Read More: Risks Mount for Global Credit Markets After Fed's Hawkish Stance

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.

Elsewhere in credit markets:

Americas

Syndicate desks project investment-grade issuers to borrow as much as $20 billion this week, but they may have to look for windows to move forward with deals if volatility persists.

Three borrowers are tapping the U.S. investment-grade market with new bond sales Monday
Prince International is selling about $1.25 billion of high-yield bonds in a two-part transaction that will go toward its acquisition of Ferro
Covis Pharmaceuticals shrunk a planned debt offering that was originally expected to price Friday to $350 million from $850 million, eliminating the U.S. dollar portion in favor of a loan
U.S. Bankruptcy Judge James Garrity on Friday approved hefty settlements between Latam Airlines Group SA and some of its largest aircraft leasing creditors

EMEA

At least 10 deals hit Europe's primary bond markets, generating more than 7 billion euros $7.9 billion) of issuance on the first day of the week.

Interest rate decisions from the BoE and ECB on Thursday coupled with continued earnings blackouts could dampen publicly syndicated activity this week, according to a Bloomberg survey
Sales of bonds with sustainable targets have jumped sevenfold in Europe this month, competing with green debt to become the dominant force in the ethical market
Italian drilling company Saipem's euro bond due July 2026 dropped 6.4 cents on the euro to 91.2 cents, after issuing a profit warning on Monday
Bondholders of online directory and digital marketing company Yell are set to take over the company after reaching a deal on a restructuring of its capital structure over the weekend, according to a statement

Asia

New issuance of Asian dollar bonds ground to a halt on Monday with some markets, including mainland China, closed for the Lunar New Year holiday.

Asian investment-grade dollar bonds are on course for their worst monthly performance since March 2020, but are still faring better than their U.S. peers
China's stressed developers face a significantly lower bill for bond payments in February compared to this month, but concerns continue to swirl about the sector's ability to raise funds
Supermarket operator Future Retail Ltd., one of India's best-known firms to fall into financial difficulties during the pandemic, is banking on the country's top court to shield it from defaulting on a 35 billion rupee ($467 million) debt payment
Dollar bonds of China Aoyuan Group were indicated higher earlier Monday, with some on pace for their biggest gains since November, after Cailian reported a Shandong state-owned enterprise might become the Chinese developer's controlling holder