US corporate debt hit hard as inflationary shock heightens economic fears

June 13 (Reuters) – U.S. corporate bonds took a hit on Monday as expectations of an aggressive rate hike cycle following stronger-than-expected inflation data last week intensified concerns over the economic outlook and the ability of companies to repay their debt.

Prices of major exchange-traded funds that track both the investment-grade bond market and the U.S. high-yield bond market have fallen, while the cost of insuring against potential defaults has risen sharply, a sign of aversion to risk.

The U.S. Federal Reserve will meet on Wednesday amid strong selling in stocks and bonds following May data that showed U.S. consumer prices rose at their fastest pace since 1981, led by soaring gasoline and food prices.

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Relentless inflation could push the Fed to raise rates more than the market previously expected, with some investment banks forecasting a 75 basis point hike this week or even eyeing a possible 100 basis point hike. Read more

A sell-off in short-term Treasuries pushed two-year US government bond yields to their highest level since late 2007, impacting credit markets.

“Yields are going up, which will make it harder for small businesses to refinance and as a result, it will be harder for them to repay debt,” said Thomas Hayes, managing member of Great Hill Capital in New York.

BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF (HYG.P) — an exchange-traded fund that tracks the US junk bond market — fell 2.1% to trade at $74 l share, its lowest since April 2020, when markets were rocked by the coronavirus crisis.

The spread on the Markit High Yield Credit Default Swap Index – which tracks the cost of insuring high yield corporate debt and is a junk market indicator – has risen to more than 570 basis points. base on Monday against 532 on Friday, reaching its highest level. since May 2020.

The spread on the equivalent investment grade index rose to 96.7 basis points on Monday from 91.1 on Friday. The spreads of the two indices have widened since the beginning of the year.

Standard Chartered said in a note on Monday that while it expected a half-point hike this week, that did not preclude larger increases of 75 basis points or even a full percentage point. .

Signs of an economic slowdown — including a survey last week showing U.S. consumer confidence plunged to a record low in early June — weren’t enough to dissuade the central bank from tackling inflation, a- she declared.

“Various parts of the credit markets are showing signs of strain…suggesting that financial markets are very concerned about the potential underpinnings of the economy here,” said Ryan Detrick, senior market strategist at LPL Financial.

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Reporting by Mehnaz Yasmin and Davide Barbuscia; Editing by Bill Berkrot

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