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Why corporate bond sales aren't as scary as they look

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New York (CNN Business)Fedand Federal Reserveaggressive rate hikesBoosted investors to dump corporate bonds in the last few weeks. Selling hasn't received as much attention as the bleeding of stocks and cryptocurrencies, but it was a pain.

Situation: The number of major exchange-traded funds wheretracks high-quality bonds from leading companieshas declined by almost 18% year-to-date. So-called“junk” bondsissued by low credit companies are 16% lower.

When traders offload corporate bonds, anxious questions often arise: Are they worried that the company may not be able to meet their debt?

A series of defaults that pull down the economy and cause market turmoil can be a big problem. But that's not what the bond market is currently signaling.

"It looks basically worse," Fraser Randy, head of fixed income at Federaled Hermès, told me.

Breakdown: Some of the corporate bond sellouts are triggered by expectations of a recession, which could push up the default number. During a recession, some companies will run out of revenue and find it difficult to cover other costs. Rising interest rates can also be a headache.

But more technical factors are also involved. Yields on government bonds moving at opposite prices are rising as inflation surges are met by the more hawkish Fed. This makes corporate bonds (usually attractive because of their high yields) unattractive, especially when Wall Street is in sales mode. According to

S&P Global Ratings, corporate defaults are expected to rise until early 2023. Credit rating agencies expect key default rates to rise from 1.4% last year to 3% by March next year.

"You'll expect to start recovering in the next three months," said Nick Kramer, an S&P analyst.

Still, those who trade corporate bonds aren't too worried if they agree that the recession is on the card.

This is because the company is in better shape than it was in the early days of the pandemic. They have taken steps to hide their cash and refinance their debt by taking advantage of the solid borrowing costs of the last two years.

"In general, a company's balance sheet is in good shape and very few companies need to refinance," Tom Ross, portfolio manager at Janus Henderson Investors, told me.

This allows businesses to absorb the effects of long-term rising interest rates and mitigate shocks.

"If interest rates remain high for a long period of time, higher interest rate costs will bite, but they will not bite for a long time," Ross said.

In addition, the company spared shareholders with share buybacks and higher dividends during the recovery from the pandemic. According to Randy, if you really need it, you can use that money instead to cover your debt costs.

"They can turn it off very quickly and divert that money to debt repayment, if needed or needed," he said.

Biden's petrol tax holidays don't change much

President Joe Biden gives Congress on Wednesdayfederal petrol and diesel taxesAsked to stop. At the end of September, he will assemble a move as needed to provide relief to US consumers — admitting that it does not solve the problem of rising energy prices.

"We can lower the price of gas and give our families a little bit of relief," Biden said in a speech from the White House.

Not so fast: This proposal has been skeptical by leading economists, but will almost certainly not pass Congress.

Former President Barack Obama once dismissed this tactic as a gimmick. Even if the savings from the tax increase are passed directly to the consumer (which is not guaranteed), a single replenishment can be only a few dollars.

In addition, suspending the federal gas tax could ultimately increase fuel demand. It only puts an additional burden on the limited supply.

Speaker of the House Nancy Pelosi stopped approving the plan in a statement after Biden's remarks.

"You will see where the consensus is for the president's proposal in the House and Senate," she said.

But the Biden administration's view of inflation as a serious political issue is the latest sign, especially for the November elections.

Number: The average price of a gallon of regular gasoline in the United States was below $ 5 a gallon this week, giving drivers a little more room.

"Because few drivers refueled last week, recent highs could have slightly reduced domestic demand for gasoline," said AAA spokeswoman Andrew Gross. Global oil prices have fallen as concerns about a recession have increased.

Lebron's stock price surge after bankruptcy

Bankruptcy does not scare hordes of armchair traders. In fact, it seems to fascinate them.

Cosmetics company Revlonshares have surged more than $ 300% in the last three trading sessions, jumping from about $ 2 to over $ 8. After a 13% drop on the day of the announcement of the restructuring plan for Chapter 11.

Vanda Research analysts have informed clients that social media chatter has skyrocketed and riskier options trading, which is the trademark of the Reddit cohort, is prevalent.

The surge is eerily reminiscent of what happened in Hertz in 2020. Stocks skyrocketed after the car rental company filed for bankruptcy. The move was accompanied by cheers from Reddit traders who were betting on shortsellers who thought Hertz shares would continue to fall.

Shortsellers are also touring Revlon and may be in the spotlight of retailers, Banda's team said.

Note: Most investors will dry out when a company declares bankruptcy. Bondholders and other creditors are often the first to line up to get some of their money back. Shareholders are usually not in a position to make a profit and their investment iswiped outwhen new shares are issued.


Accenture, Darden Restaurants and Rite Aid will report results before the US market opens. Blackberry, FedEx, Smith&Wesson will follow after the store closes.

Today: The second day of testimony by Federal Reserve Chairman Jerome Powell before Congress opens at 10 am.