High Yield bonds, spread at 3.2% in the US and 2.5% in Europe
Inflation threatening energy shock hits the most fragile issuers
Key points
When there are shocks in the markets, such as the war in the Middle East, investors sell riskier financial assets and take refuge in more solid ones.
In the bond market, it is the less reliable bonds that suffer from selling, price declines and a widening of the spread. The spread is, in fact, the yield difference to more reliable government bonds that these bonds have to pay to attract investors. The increase in yield is a double-edged sword, because it leads to higher earnings, but signals the vulnerability of the bond, which is all the greater the longer the maturity and the less reliable the issuer.
According to experts, however, the spread widening in recent days has also been contained for high-yield bonds, which are, in fact, riskier.
Energy Matters
"High yield spreads," says Simon Wiersma, investment manager at Ing, "have been remarkably resilient and have widened slightly, between 3% and 3.2% in the US and 2.4%-2.6% in Europe. This suggests that markets are thinking about an energy-related shock, rather than credit stress, because corporate balance sheets are strong overall, default rates of issuing companies are expected to fall, and yields continue to cushion the impact of price movements".
The feared inflationary flare-up resulting from the rise in oil and gas prices caused by the conflict is the key to understanding market movements. "The surge in gas prices of more than 50% in two days with Qatar's supplies interrupted," says Federico Valesi, Cfa, head of fixed income at Quaestio Sgr, "is the real needle in the balance: if energy prices remain high for a long time, the concern shifts from short-term volatility to the risk of recession, which would then drive down government yields and hit the most fragile high-yield spreads.
