"Leading Indicator Of Potential Weakness" Looms In Corporate Credit Markets

While credit spreads are broadly-speaking unmoved by recent chaos, signals are emerging that investors are starting to get worried about the $7.2 trillion U.S. investment-grade bond market.

Bloomberg's Lisa Abramowicz points out that bond buyers are starting to show some signs of unease, with traders are increasingly turning to derivatives to hedge against potential losses.

This is a marked shift from earlier in the year, when many bond investors seemed unwilling to give up any returns for such protection.

During most of 2017, trading volumes in credit-default swaps sagged well below recent years' averages (the red oval below)

Now, however, Abramowicz notes that activity in the derivatives has risen sharply (green oval above), with volumes surging more than 110 percent in the week ended Aug. 11 compared with the same week in 2016.

That contrasts with a more than 10 percent decline in volumes on average throughout 2017 compared with the period last year.

"This is often a leading indicator of potential weakness," Peter Tchir, head of macro strategy at Brean Capital LLC, said on Bloomberg Radio on Tuesday.

Investors don't want to sell their corporate-bond holdings because they know it could be difficult to buy them back in the future. But they are are feeling less secure owning the debt, especially at such high valuations. So they're either getting exposure to the securities in a way that's easy to exit quickly in a pinch, or they're paying a premium to cover any losses incurred during a selloff.

"There are events on the horizon that could cause a dislocation," said Anindya Basu, a credit derivatives strategist at Citigroup Inc. "You're seeing that feed through to the market."