By Davide Barbuscia

NEW YORK, (Reuters) – Investors bought U.S. investment-grade and corporate high-yield bonds Friday. This was in line with equity market weakness and a sign that investors are reducing their risk aversion in light of concerns about a string of rate increases.

As investors bet against credit deterioration, the Markit North American High-Yield CDX Index fell to a record low price of 105.947%.

It was only a little less than Wednesday when the U.S. Federal Reserve suggested multiple interest rate rises this year.

The spreads for Markit’s North American Investment Grade CDX Index climbed to 62.5 basis points. This was their highest level since Nov. 2020. Investors hedged against a decline in credit quality.

In tandem with the weakness in the major U.S. stock indexes, investors pulled their U.S. corporate bonds outright after the Fed suggested in a policy update that an interest-rate hike might be on the horizon. It also indicated that the Fed would increase its tightening policy to counter unabated inflation.

Ryan O’Malley is a Sage Advisory fixed income portfolio manager in Austin. He stated that “people are expecting a lot more rate hikes and they’re expecting (Fed’s) balance sheet runoff speedier than what people expected even a few months ago”.

Spreads are the rate of interest investors pay to own corporate debt rather than safer U.S. Treasury bond securities. They narrowed as government yields fell, driving more money to Treasury-rated securities.

O’Malley said that money has been “pushed out to extreme risk areas, because there was no way to make any out of Treasuries, investment grade, or the front end”.

After the Fed’s update, the yield spread on the ICE(NYSE:) BofA U.S. High Yield Index rose from 325 bps Wednesday to 346 basis point on Thursday.

Even though spreads have been rising in tandem with declining risk appetite, some investors believe they will only increase slightly because of a strong economic environment.

Jack McIntyre (a Brandywine Global portfolio manager) stated that spreads in corporate sectors should not be widen. “Corporates are in good financial position, and they have benefited two years of easy cash.”

Capital Economics research says that spreads will not rise if equity markets are weak, or if investor confidence is lower, then the spreads should be marginal.

“This is underpinned by our view that, while global economic growth will slow, the economic backdrop is still likely to be fairly positive; we are not anticipating anything that would significantly challenge firms’ ability, in general, to service their debts,” it said in a report on Friday.