By Davide Barbuscia

NEW YORK, (Reuters) – A temporary rally in U.S. credit market after the U.S. Federal Reserve began hiking rates last month wasn’t sustainable. Some corporate bonds fell to new lows Monday due to rising bond yields as well as concerns about the economic outlook.

BlackRock’s iShares iBoxx $ High Yield Corporate Bond ETF – an exchange-traded fund which tracks the U.S. junk-bond market – fell 0.6% to trade at $79.76 a share on Monday, its lowest since May 2020.

Its equivalent in investment grade was also sharply down, at over 1%. This is its lowest point since March 2020.

The year has started with a rough start for corporate bonds. However, credit spreads (the interest rate premium investors want to keep corporate debt rather than safer U.S. Treasury Bonds) have tightened since the Fed raised rates in March.

This was in line with the stocks rally that was partially driven by investor comfort from more information on rate hikes, and Fed’s decisive action to combat rising inflation.

However, U.S. credit markets are being pushed back by lingering concerns about the effects of tighter money policies on borrowing costs and corporate profits as well as the possibility that the Fed will attempt to slow down the economy.

As investors bet on credit quality deterioration, the Markit CDX North American Investment Grade Index has increased 6 basis points to 72.843 base points.

Mark Luschini of Janney Montgomery Scott, Chief Investment Strategist said that “economic conditions are showing some signs suggesting perhaps slowing somewhat down”.

He said that this could lead to wider credit spreads. Investors should take a more objective view of what conditions will continue to permit lower-rated creditors to finance their debt financing.

U.S. Treasury yields rose last Wednesday on back of U.S. Central Bank’s hawkish signals. The central bank is becoming increasingly determined tighten financial conditions via rate hikes or so-called Quantitative Tightening. Its plan to shrink its balance sheets and increase rates.

The benchmark rose Monday to its highest point in over three years, as investors eagerly awaited key inflation figures later this week. This data will help determine how hawkish Fed policymakers should be.

Luschini said that a combination of rate hikes at a faster pace and tightening quantitatively could be a mix for creating the liquidity conditions most suited to promote both high flying equity stocks as well the more risky fixed income components, such as credit and low-rated credit.