Geopolitical tensions are US credit investors’ top concern, BofA survey says

By Thomson Reuters Apr 22, 2024 | 3:06 PM

By Matt Tracy

(Reuters) – Geopolitical risk topped the list of concerns among U.S. corporate credit investors, according to a new survey by BofA Global Research.

The finding coincides with an escalation in the conflict in the Middle East. Israel has been fighting the Hamas and Hezbollah militant groups since October, and hostilities with Iran ramped up last week.

While geopolitical risk has remained the top concern cited by investors, its share grew in April to 80%, according to the survey, which was released on Friday.

Investors, however, have remained bullish on investment-grade corporate credit despite the growing tensions, with gross new issuance totaling $33.6 billion last week, driven largely by banks coming out of earnings blackouts.

Dry powder has continued to be deployed, and credit positioning grew to 29% net overweight, according to BofA, which said it expects between $15 billion and $30 billion in supply this week.

Only 18% of investors surveyed reported above-normal cash levels, the lowest since September 2020, according to the survey.

Investors cited inflation as the second-biggest concern for credit’s outlook, despite markets pricing in 120 basis points in Fed interest rate cuts over the next two years, according to the survey.

“That means the case for cuts remains intact,” BofA analysts noted. “However, risks to this outlook have clearly increased, which could weigh on flows going forward.”

While high-grade credit has remained attractive, sell-offs in high-yield corporate bonds were strong last week. There were $2.2 billion in high-yield outflows, the biggest weekly outflow since October.

(Reporting by Matt Tracy; Editing by Paul Simao)