DEBT investors are loading up on insurance against corporate bond defaults as concerns mount about the health of the US economy and the European consumer. The cost of protecting a basket of North American high-grade credits against default surged on Friday by the most since October. Trading volumes on that credit default swap index, the CDX.
NA.IG, reached the highest daily level in about five months on Friday, according to data compiled by Bloomberg. The European equivalent this week had its busiest day since French President Emmanuel Macron in June called a surprise election.
Credit derivatives are often the first instruments to show signs of weakness in a market downturn, in part because selling bonds can take longer. Traders upped their purchases of protection after a slew of weak labor market data raised concerns that the Federal Reserve has waited too long to cut interest rates. Money managers have also been rattled by underwhelming earnings from technology companies and consumers cutting back on everything from fast food to luxury handbags.
“Weaker macro and impact on earnings going forward is the one underpriced risk in the markets in our view,” said Raphael Thuin, head of capital market strategies at Tikehau Capital. “This could end up affecting credit spreads, at a time when valuations are nowhere near cheap.” Bond spreads look poised to widen because they are currently at the tight end of a range that was justified by factors including rate cut expectations .