It’s been a wild ride in capital markets these past few weeks as investors have pivoted risk-off, and high yield bonds are no exception. As of May 9, the number of high yield bonds trading above 90 cents on the dollar fell to their lowest level since the same time in 2020, when the world was still reeling from the shock of the pandemic.

What does this mean for issuers concerned about increasingly volatile markets?

1/ There’s no two ways about it, the market is in bad shape

Currently, 69% of all high yield notes tracked by Debtwire are trading above 90 cents on the dollar, compared with 62% two years ago. At the other end of the scale, the number trading below 70 cents on the dollar has reached its highest level since March 2021—and the market is in far worse shape now than it was back then. In the second week of this month, notes priced between 70 and 90 cents represented almost a third of the market, versus just 3% in March last year.

2/ Stay sharp—this is not the bond market of 2020 

While pricing on riskier bonds has been moving into similar territory as two years ago, there’s a big difference between now and then. The Federal Reserve turned on the money printer in 2020, stimulating the US economy out of recession and stabilizing financial markets. It worked—but it may have worked a little too well, with inflation riding the coattails of all that easy money.

Now that the Fed has realized inflation may not be transitory, it’s changing course. A 50bps rate hike was introduced earlier this month in an effort to tame runaway prices.

Markets are not only pricing in multiple rate hikes for the rest of the year, including another one next month, they’re also anticipating a new wave of supply chain issues on the back of China’s latest lockdowns.

3/ There’s a very small chance we’re wrong 

Of course, it’s possible that bond prices could rally in H2 2022 if conditions break right. But it’s a big if.

Liquidity is showing signs of pulling back from asset classes across the risk spectrum—from bonds to equities and crypto markets—and inflation is the Fed’s priority.

It will take some majorly unexpected macro data to knock the central bank off its chosen course. Then again, given everything that’s happened in the past two years, the unexpected may be par for the course.