U.S. dollar banknotes are seen in this November 7, 2016 illustration. REUTERS/Dado Ruvic/Illustration

NEW YORK, Feb 25 (Reuters) – U.S. credit markets have seen heightened volatility, spurred by Russia’s invasion of Ukraine, in addition to uncertainty surrounding monetary policy changes, hurting bond yields. investors and complicating borrowers’ ability to access finance.

Fears that the US Federal Reserve might raise rates too aggressively, thereby increasing borrowers’ cost of funding, have weighed on the corporate bond market this year. Read more

That weakness was compounded this week when Russia invaded Ukraine, pushing markets into risk aversion mode and widening spreads – the interest rate premium investors demand to hold corporate debt over to safer US Treasuries.

On Thursday, the yield spread on the ICE BofA US High Yield Index (.MERH0A0), a commonly used benchmark for the junk bond market, jumped 5.7% to 393 basis points, hitting its all-time high. level since January of last year.

“The escalation of the Russian-Ukrainian conflict adds to the (already long) list of uncertainties, including inflation and the future path of monetary policy, which have weighed on credit spreads in recent months,” said Barclays strategists Bradley Rogoff and Dominique Toublan. in a research note this week.

“As such, we expect spreads to remain under pressure and choppy,” they said.

Sharp price swings have limited new debt issuance by high-yield borrowers this year, and this week saw a single $1 billion deal in the U.S. high-yield market, the strategy strategist said. Deutsche Bank, Craig Nicol, in a research note Friday.

That means the year-to-date supply of new US dollar-denominated high-yield bonds is $38.9 billion, down 55% year-over-year. The primary euro market was closed all week, leaving year-to-date supply down 57% year-on-year, he said.

“While the rate hike helped to somewhat offset the damage to yields, the magnitude of the spread widening still resulted in a total return of -0.4% for $HY this week,” Nicol said.

Investment-grade U.S. corporate debt could become more sensitive to global macro risks than high-yield debt, Barclays strategists said, as investment-grade companies tend to be more global while high-yield credit is more focused on the domestic market.

The yield shown on the US ICE BofA Corporate Index (.MERC0A0), which tracks dollar-denominated investment grade corporate debt, jumped 6.5% on Thursday.

Reporting by Davide Barbuscia; Editing by David Gregorio

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