Nearly $ 3 billion fled from unwanted bond marketable index funds in the first two days of this week, new debt issuance dried up and the underlying bonds suffered their worst two-day recession since Brexit.
This is a brutal reversal for a corner of the debt market that, until recently, had allayed worries about the spread of COVID-19 disease around the world, while providing investors with some of the best returns. weaker to date.
While global stocks have suffered some of their worst consecutive losses in years, the market for “unwanted” corporate bonds, or debts with lower quality credit ratings, has been in turmoil. No US company sold debt in the first three days of this week, while exchange-traded funds experienced a wave of outflows.
“The market has absolutely stopped,” said David Norris, US credit manager at TwentyFour Asset Management, referring to the companies’ plans to raise new debt in the US junk bond market.
He said that if the current sale of the sector continues, investors could see a repeat of December 2018, when the issuance of substandard bonds stopped. A prolonged freeze could become a bigger problem, he said, pointing to trash-rated corporate borrowers who are facing billions of dollars of debt maturing this year.
“What choice do you have? Do you wait for the markets to stabilize or do you want to take your chance?” Said Michael DePalma, portfolio manager of a high yield exchange traded fund for Mackay Shields, in an interview, adding that businesses were likely to wait for the recent turmoil.
“
“At some point, these people will be disappointed.”
“
Until last week, traders were still buying bonds at a brisk pace and issuers had no trouble discharging new debt into the market, even though yields from a basket of high-yield bonds were largely follow-ups were 5.88%, almost a precedent. record 5.70% set in June 2014, according to data from Bank of America Merrill Lynch.
This has changed with the rapid spread of the coronavirus beyond China, Germany and Italy, as well as Asian manufacturing power in South Korea, which has raised growing concerns about the risk of coronavirus derailment by coronaviruses. , just like the stock markets of the past few days.
“Growth is a key indicator for high-yield companies,” said Fran Rodilosso, manager of portfolio ETF bonds at VanEck, at MarketWatch. “You now have unforeseen impacts on the global economy, such as a potential global health crisis, weighing on the markets.”
Falling bond prices push yields higher, as they move in the opposite direction, and also increase the amount of spread or additional compensation that investors demand from bonds versus risk-free T-bills. Spreads jumped 4.17% on junk bonds at the end of trading on Tuesday, marking the largest increase in two-day spreads since the UK voted in 2016 to leave the European Union, officials said. Bloomberg data.
Junk-Bond ETF test
A record rush of cash has also left exchange traded funds that focus on high yield US bonds.
Matthew Bartolini, SPDR Americas research manager at State Street Global Advisors, has set junk bond ETF outflows at $ 2.7 billion combined for Monday and Tuesday, the largest cash outflow period of two days.
“But two things happened,” Bartolini told MarketWatch. “This is clearly a risk reduction event resulting from the growth revisions,” he said. “But I think it’s also a great case study on the additional liquidity of what ETFs can provide.”
ETF SPDR Bloomberg Barclays High Yield Bond ETF
JNK,
saw its highest trading volume ever recorded on Tuesday, although stocks fell less than 0.8%, according to FactSet data.
“We see investors turning to ETFs for their liquidity needs,” said Bartolini. “We see it over and over again, in several classes, high performance being one of them.”
US stocks closed lower on Wednesday with the Dow Jones Industrial Average
DJIA,
and the S&P 500 index
SPX,
both lose about 8% in their five-game losing streak.
But JNK stocks managed a 0.1% gain on Wednesday, which was its second highest day for trading volume, according to FactSet.
See: Here’s How ETF Investors Responded As Coronavirus Concerns Shaken Global Markets
“The high yield was an indirect indicator of equities. It would be a surprise if credit spreads did not widen with the deep equity correction, “said Max Gokhman, head of the asset association at Pacific Life Fund Advisors, in an interview.
High-performing firms can be particularly vulnerable to rapid economic growth or corporate profits, mainly because their high debt and borrowing costs can make them more vulnerable to default.
Here is a table of increasing defaults in the high-yield energy component, which has struggled with the return of low crude oil prices:
Despite this, some investors are adopting a wait-and-see attitude until they can further clarify the impact of the virus.
“It is a bit premature to assess the potential implications around the coronavirus,” Steven Market, global debt and credit manager at PineBridge Investments, told MarketWatch.
Norris, who attended JP Morgan’s high-yield annual conference in Miami, said there were no signs of panic yet and that investors appeared ready to put money into the sector.
“Investors who have hung there have always been rewarded in the past,” said DePalma, but also warned, “At some point these people will be disappointed.”
Nearly $ 3 billion fled from unwanted bond marketable index funds in the first two days of this week, new debt issuance dried up and the underlying bonds suffered their worst two-day recession since Brexit.
This is a brutal reversal for a corner of the debt market that, until recently, had allayed worries about the spread of COVID-19 disease around the world, while providing investors with some of the best returns. weaker to date.
While global stocks have suffered some of their worst consecutive losses in years, the market for “unwanted” corporate bonds, or debts with lower quality credit ratings, has been in turmoil. No US company sold debt in the first three days of this week, while exchange-traded funds experienced a wave of outflows.
“The market has absolutely stopped,” said David Norris, US credit manager at TwentyFour Asset Management, referring to the companies’ plans to raise new debt in the US junk bond market.
He said that if the current sale of the sector continues, investors could see a repeat of December 2018, when the issuance of substandard bonds stopped. A prolonged freeze could become a bigger problem, he said, pointing to trash-rated corporate borrowers who are facing billions of dollars of debt maturing this year.
“What choice do you have? Do you wait for the markets to stabilize or do you want to take your chance?” Said Michael DePalma, portfolio manager of a high yield exchange traded fund for Mackay Shields, in an interview, adding that businesses were likely to wait for the recent turmoil.
“
“At some point, these people will be disappointed.”
“
Until last week, traders were still buying bonds at a brisk pace and issuers had no trouble discharging new debt into the market, even though yields from a basket of high-yield bonds were largely follow-ups were 5.88%, almost a precedent. record 5.70% set in June 2014, according to data from Bank of America Merrill Lynch.
This has changed with the rapid spread of the coronavirus beyond China, Germany and Italy, as well as Asian manufacturing power in South Korea, which has raised growing concerns about the risk of coronavirus derailment by coronaviruses. , just like the stock markets of the past few days.
“Growth is a key indicator for high-yield companies,” said Fran Rodilosso, manager of portfolio ETF bonds at VanEck, at MarketWatch. “You now have unforeseen impacts on the global economy, such as a potential global health crisis, weighing on the markets.”
Falling bond prices push yields higher, as they move in the opposite direction, and also increase the amount of spread or additional compensation that investors demand from bonds versus risk-free T-bills. Spreads jumped 4.17% on junk bonds at the end of trading on Tuesday, marking the largest increase in two-day spreads since the UK voted in 2016 to leave the European Union, officials said. Bloomberg data.
Junk-Bond ETF test
A record rush of cash has also left exchange traded funds that focus on high yield US bonds.
Matthew Bartolini, SPDR Americas research manager at State Street Global Advisors, has set junk bond ETF outflows at $ 2.7 billion combined for Monday and Tuesday, the largest cash outflow period of two days.
“But two things happened,” Bartolini told MarketWatch. “This is clearly a risk reduction event resulting from the growth revisions,” he said. “But I think it’s also a great case study on the additional liquidity of what ETFs can provide.”
ETF SPDR Bloomberg Barclays High Yield Bond ETF
JNK,
saw its highest trading volume ever recorded on Tuesday, although stocks fell less than 0.8%, according to FactSet data.
“We see investors turning to ETFs for their liquidity needs,” said Bartolini. “We see it over and over again, in several classes, high performance being one of them.”
US stocks closed lower on Wednesday with the Dow Jones Industrial Average
DJIA,
and the S&P 500 index
SPX,
both lose about 8% in their five-game losing streak.
But JNK stocks managed a 0.1% gain on Wednesday, which was its second highest day for trading volume, according to FactSet.
See: Here’s How ETF Investors Responded As Coronavirus Concerns Shaken Global Markets
“The high yield was an indirect indicator of equities. It would be a surprise if credit spreads did not widen with the deep equity correction, “said Max Gokhman, head of the asset association at Pacific Life Fund Advisors, in an interview.
High-performing firms can be particularly vulnerable to rapid economic growth or corporate profits, mainly because their high debt and borrowing costs can make them more vulnerable to default.
Here is a table of increasing defaults in the high-yield energy component, which has struggled with the return of low crude oil prices:
Despite this, some investors are adopting a wait-and-see attitude until they can further clarify the impact of the virus.
“It is a bit premature to assess the potential implications around the coronavirus,” Steven Market, global debt and credit manager at PineBridge Investments, told MarketWatch.
Norris, who attended JP Morgan’s high-yield annual conference in Miami, said there were no signs of panic yet and that investors appeared ready to put money into the sector.
“Investors who have hung there have always been rewarded in the past,” said DePalma, but also warned, “At some point these people will be disappointed.”