The US corporate bond market wrapped up its busiest month on record in September with an average daily volume exceeding USD 43 bn, but cracks could be forming under the surface, the IMF warned last week in its Global Financial Sustainability Report. Although trading activity surged, narrow credit spreads are raising concerns about a sudden repricing of bonds if markets face turbulence, Bloomberg reports.

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A downturn could hit when it’s least expected: While current liquidity appears strong, the IMF cautioned that smooth trading conditions often vanish in times of stress. A sudden market shock — such as volatility surrounding the upcoming US presidential election — could trigger a rapid deterioration. “It just looks like a disaster in the making,” said Global Head of Investment Grade Debt at Goldman Sachs Group Jonny Fine.

The rise of e-trading is helping: Platforms like MarketAxess and Tradeweb have supported liquidity, with 50% of high-grade bonds now traded online. Portfolio trading, where large blocks of bonds are exchanged in a single transaction, has also become a key driver, making up 25% of dealer-client trades last month, up from near-zero in 2018.

Risks remain, despite record numbers: While the US Federal Reserve’s policy outlook supports the market, analysts warn that complacency could backfire. “My concern is the kind of self-fulfilling prophecy of everybody thinking liquidity is good and getting better,” the business information service quotes head of fixed income sales and trading at US Bank Blair Shwedo as saying. “Does that lead us to a point where, because everybody’s under the assumption that liquidity is really good, the music stops and we see a drastic deterioration?”

Bottom line: In anticipation of volatility striking at any time, analysts are already preparing for a tougher environment, with some pointing to weaker economic data, potential policy shifts, and corporate refinancing challenges as risks to watch.

Upcoming data points to watch:

  • USD 20 bn of high-grade US bond sales are expected next week.
  • US GDP for 3Q 2024 will likely come in at 3.1%, according to Bloomberg Economics.
  • October payrolls report on 1 November could show the first negative figure since 2020.
  • Eurozone inflation is projected to hold steady at 1.7% in October.

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THE CLOSING BELL-

The EGX30 rose 0.9% at yesterday’s close on turnover of EGP 3.4 bn (18.0% above the 90-day average). Regional investors were the sole net buyers. The index is up 23.8% YTD.

In the green: ADIB (+3.6%), Beltone Holding (+2.7%), and CIB (+2.5%).

In the red: Juhayna (-4.1%), AMOC (-1.5%), and Emaar Misr (-0.7%).

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