(Bloomberg) -- Corporate credit staged a stellar rally this past week, pushing spreads and yields lower and helping spur billions of dollars worth of inflows into bond funds. The question on the minds of money managers, though, is how long will it last?
A stronger-than-expected jobs report on Friday that sent the unemployment rate to a five-decade low could mean that the Federal Reserve will continue to raise rates more aggressively to help cool off the economy and tamp down inflation, which would put renewed pressure on corporate credit.
In the near term, blue-chip issuance is likely to cool off, after lower borrowing costs help spur $56 billion of new bond sales this past week, double dealers’ projections. U.S. high-grade syndicate desks expect about $20 billion to $25 billion of issuance next week.
High-grade funds, meanwhile, raked in $1.22 billion in the week ending Aug. 3, according to Refinitiv Lipper data, ending a record streak of 18 weeks of withdrawals amounting to $74 billion. More inflows may be on the horizon, according to Bank of America Corp. strategists.
“Flows tend to follow returns with about a month lag, particularly for funds that tend to be dominated by retail investors,” the strategists wrote in note Thursday. “The increase in bond prices over the past month in a half should now attract inflows, which we saw this past week.”
U.S. high-yield funds saw an influx of nearly $3 billion this week, spurring Charter Communications and Advisor Group to sell new bonds on Thursday. The yield on junk-rated debt fell to 7.55% Thursday from a high of 8.89% in June, according to Bloomberg index data. However, there are currently no new junk-bond deals in the pipeline.
Risk premiums on speculative-grade debt are likely to widen though, according to Hunter Hayes, portfolio manager of the Intrepid Income Fund at Intrepid Capital Management. He doesn’t see risk premiums hitting levels seen during the Great Recession.
“I don’t think we have the same powder keg environment we had back then, but I still expect spreads to widen as the economy sputters,” Hayes said in a phone interview.
In the U.S. leveraged loan market, commitments are due on at least three deals next week, including a $1.25 billion loan from CSC.