Inflation and war is an explosive cocktail, the bond market says

The cost to insure Russian bonds has spiked to the highest since 2008.

Markets are also pricing the risk of a Ukrainian invasion and more sanctions on Russia. The Russian CDS spread has risen to 880bps, the highest since the 2008 global financial crisis. At the same time, eurodollar Russian bonds with 2027 maturity dropped to 60 cents on the dollar. To suffer the most, however, is Ukraine's 2033 eurodollar bonds dropping in distress territory at 38 cents on the dollar.

Although it's quite natural to see the above happening, it's important to keep in mind that these developments increase emerging markets' cost of funding, causing problems within this space.

USD and EUR credit risk soar, putting even more pressure on primary corporate bond issuance.

A problem that many are overlooking is that the current situation is adding pressure on an already difficult credit market. Junk bonds haven’t priced in the primary US bond market since February the 10^th. After a two-week lull, Twitter was the first corporate to sell $1 billion junk bonds. Yet it cannot be taken as a bellwether, as Twitter is a well-known name in the junk bond space. Today's issuance of BellRing Brands will be more noteworthy, as it will show whether appetite for junk remains sustained despite widening credit spreads and volatility.

The same can be said about Europe despite a junk bond sale deal priced last week. Choppy primary bond markets are a huge red flag for the corporate bond space and central banks, which aim to maintain the smooth functioning of markets.

We believe that the evolving macroeconomic backdrop will deteriorate demand for junk bonds. A tantrum is almost inevitable as stagflation risks become more evident.