(Bloomberg) - Rising prices amid a US economic slowdown will menace embattled credit markets, if history repeats.
The current inflation and growth environment is most akin to the 1973 to 1975 and 1978 to 1980 time periods, when credit markets did badly, according to Barclays Plc. strategists led by Dominique Toublan.
“Credit performance was poor then, and we do not expect this time to be different,” the strategists wrote in a note dated Aug. 12. The asset class “could experience even more pain if the current stagflationary backdrop develops into a deflationary one.”
Through the 1970s periods of rising inflation and weak growth, monthly high-grade credit excess returns were negative 14 basis points on average. Monthly performance was negative 58% of the time, about 15% higher than the long-term average, the strategists wrote.
Credit markets have been battered this year, particularly high-grade, as Treasury yields surged and the Federal Reserve boosted rates to tackle inflation. Despite a July rally -- which marked the best monthly return in two years -- investment-grade bonds are down almost 12% for 2022 so far, according to Bloomberg index data.
Bonds issued by technology companies, banks and basic industry sectors outperformed through inflationary years in both investment-grade and high-yield, according to Barclays. High-grade energy and junk-rated insurance debt also fared better.
During periods of stagflation, insurance, communications and consumer cyclical sectors underperformed, the strategists wrote.
“Stagflationary environments have not been kind to credit, with returns being negative on average when the growth backdrop deteriorates,” the strategists wrote.
Credit investors should be wary of stagflation or significantly slower growth, according to Terence Wheat, co-head of investment-grade corporate bonds at PGIM Fixed Income. He expects high-grade spreads to tighten from current levels before widening out by year-end as the US economy slows.
The spread on the benchmark high-grade index tightened to 131 basis points on Monday, off the 2022 peak of 160 basis points struck on July 5.
“There is still a probability of a deeper recession coming, so we have to be wary of that,” Wheat said.
There is, however, evidence that the worst of inflation may be over, according to David Norris, head of US credit at TwentyFour Asset Management. “The discussions on inflation is what’s going to drive performance,” he said. “There are very good arguments to suggest it has reached its peak.”
Norris expects investment-grade debt to perform better in the fourth quarter. He views spreads at 150 basis points to 160 basis points as good entry points.
Elsewhere in credit markets:
Americas
Ford Motor Co is taking advantage of a credit-market rally to sell green bonds. The vehicle maker is issuing a 10-year unsecured green bond with early pricing discussions suggesting a yield of about 6.4%, according to a person familiar with the matter.
-
Emerging-market companies are refinancing foreign-currency bonds at the slowest pace in seven years as central banks in the US and Europe raise interest rates, pulling back from easy-money policies businesses worldwide once relied on to cut costs
-
Olympus Water US Holding, a chemicals supplier and manufacturer, is marketing a $325 million junk-bond sale to help finance the acquisition of Clearon
-
It’s slated to price on Aug. 17
-
-
Commitments are due on two leveraged loans, including a $300 million deal for The Chefs’ Warehouse that will refinance debt and add cash to the company’s balance sheet
-
For deal updates, click here for the New Issue Monitor
-
For more, click here for the Credit Daybook Americas
EMEA
Financial issuers dived into the primary market on Tuesday, sparking the most sales in more than a month.
-
Issuance returned after a gauge of high grade bond risk remained below 100 for a fourth consecutive day and European stocks climbed
-
High yield-rated Storskogen is shelving plans to issue its first euro bond due to volatile market conditions, CEO Daniel Kaplan said
-
The ECB added three new securities to its CSPP and PEPP programs during the week ended Aug. 12, according to central bank data analyzed by Bloomberg
-
After the worst half in memory for European credit markets, a second-half rebound in corporate debt sales is likely, according Bloomberg Opinion columnist Marcus Ashworth
Asia
China’s developer stocks and dollar bonds surged Tuesday on reports of a plan that could help some raise fresh financing which is ultimately guaranteed by the state.
-
Mobile phone operator DITO Telecommunity Corporation is looking to extend the maturity on $800 million worth of debt from Bank of China Ltd. and eventually convert it into a long-term loan
-
Spreads on Meituan Class B’s 2030 dollar bond widened sharply, following a Reuters report that Tencent Holdings Ltd. plans to sell all or much of its stake in the food delivery giant
-
South Korean individual investors are buying more bonds sold by non-bank financial companies due to higher yields and shorter tenors, contributing to a tightening in their spreads, according to Kiwoom Securities
By Olivia Raimonde
