Higher inflation and lower growth test corporate bonds

Significance

Investment-grade borrowing costs have risen in the United States, Europe and emerging markets (EM) this year. The increase has been much more pronounced for non-investment-grade borrowers in EM and developed markets as fears of a global recession intensify.

Impacts

• If corporate bond spreads widen substantially, the Federal Reserve is less likely to pause or halt rate hikes campaign by early to mid-2023.
• Corporate bonds tend to be less traded than shares or sovereign bonds; global regulators are assessing how to improve market liquidity.
• Fears about China’s property market remain high -- developer Shimao Group Holdings defaulted on a USD1bn dollar-denominated bond on July 3.
• The Brent crude oil price remains close to historical highs, providing a major fillip to the high-yield bonds of energy firms.