Here are the “main undervalued risks” for junk bonds after one year for the record books

Credit conditions have not been so relaxed for US companies in many years, helping to fuel the wave of record borrowing of around $ 500 billion this year in the ‘junk’ or high yield bond market. , according to BofA Global.

But easy borrowing terms can also make the “market vulnerable to a risk reset,” Oleg Melentyev’s high-yield credit team warned in its 2022 outlook, particularly if “excessive tightening” in the market. central bank policy takes hold or other “key undervalued risks” occur. the high yield bond market of about $ 1.6 trillion.

While Melentyev’s team sees “no shortage of concerns” like inflation, energy shortages and potential issues with the Chinese real estate market that could rock investors, she also said those risks are likely. understood by investors in unwanted bonds and integrated into the market.

See: Corporate debt investors brace for tighter financial conditions in 2022

Risks hidden under the radar would be of greater concern, they said, with a central bank policy error at the top of their list of undervalued “managed” risks, or those resulting from deliberate action by the central bank. a government (see graph).

The central bank’s policy error is an undervalued risk

BofA Global

A new variant of the coronavirus exceeds their undervalued “exogenous” risks, or factors largely beyond the control of governments or companies.

Fears over the omicron variant of the virus have been blamed in part on market volatility over the past two weeks, with US stocks ending lower on Monday but the S&P 500 SPX index,
still less than 1% of the record territory.

Another investor concern has been whether the Federal Reserve could be prompted to sketch larger cuts in market support during the pandemic than expected, as it battles inflation at its highest level in nearly 40 years. year.

Read: 5 things to watch when the Federal Reserve announces its policy decision on Wednesday

So far, funds that replicate high yield bonds have been relatively resilient. The SPDR Bloomberg High Yield Bond ETF JNK,
+ 0.02%,
one of the two largest exchange traded funds in the US high yield bond market, and the iShares iBoxx $ High Yield Corporate Bond ETF HYG,

both were up about 1.2% on the month through Monday, according to FactSet data.

Despite their list of worries, BofA Global analysts also have a largely bullish outlook for US junk bonds, especially with issuance slated at a solid $ 425 billion for 2022.

This compares to annual issuances which have only started to steadily exceed $ 200 billion in the United States over the past decade, according to Deutsche Bank.

The junk-bond offer in the United States is booming

German bank

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