By Sebastian Pellejero
Investors’ rush into lower-rate junk debt drove yields to record highs, reflecting Wall Street’s thirst for fixed-income yields and growing confidence that even troubled companies can survive the downturn. pandemic.
The return of a triple-C-rated corporate bond index stood at an all-time low of 6.42% on Thursday, according to data from Bloomberg Barclays. This was down from 7.4% at the start of the year. Yields fall when bond prices rise.
Record yields on lower-rated bonds mark a reversal after pandemic closures fueled a sell off of riskier debt less than a year ago. At the time, investors expected many struggling companies to go bankrupt or default. Credit markets froze, pushing yields towards recent post-crisis peaks, especially for low-rated companies.
Actions by the Federal Reserve, including cutting interest rates and buying bonds for billions of dollars, have helped a rally in corporate debt. With interest rates close to zero, investors ventured into riskier assets, including rotten listed corporate bonds, in search of higher yields. This has helped many troubled companies refinance their debt at lower interest rates.
Now, the prospect of vaccines and a return to economic normality is fueling a rally in the lowest-rated junk debt, a market made up of companies particularly sensitive to the direction of the economy. According to Bank of America, Triple-C-rated corporate bonds have so far returned 2.2% to investors in January, outpacing gains on higher-rated corporate bonds and leveraged loans.
“There isn’t even a very close historical comparison of the degree of improvement in credit market conditions to what we’ve seen here,” the bank’s analysts wrote in a recent note. At recent levels, the high yield market is implying a default rate of 2.1% over the next 12 months, they added, below what many feared entering 2021.
One thing always attracts investors: the extra yield, or spread, that lower-rated junk bonds pay over benchmark US Treasuries. On Thursday, investors were given an additional 5.77 percentage points for holding triple-C corporate bonds instead of Treasurys, according to data from Bloomberg Barclays. This compares to 3.43 percentage points for junk bonds overall.
Many companies take advantage of investor demand to sell new debt. High-yielding firms have raised more than $ 33 billion so far this year as of Thursday, according to S&P Global Market Intelligence’s LCD. This is an increase of around 55% from the amount raised during the same period in 2020.
Triple-C-minus listed hospital operator Community Health Systems Inc. sold more than $ 1.7 billion in junior senior bonds this week at a yield of 6.756%. The disproportionate demand for the offering allowed the company to more than double the initial $ 750 million sale size, while reducing the initial yield offered.
Community Health’s newly issued bond, due 2029, recently traded at 102.33 cents on the dollar, according to MarketAxess, implying a yield of 6.336%.
NGL Energy Partners LP’s bonds, rated triple C plus, hit pandemic-era highs after the company on Thursday announced a sale of $ 2.05 billion bonds to repay debt that was due.
NGL’s $ 425 million bond due 2026 recently traded at 80.50 cents on the dollar, according to MarketAxess, which implies a yield of 12.718%. That was an increase of 73.97 cents on January 19.
Write to Sebastian Pellejero at [email protected]
(END) Dow Jones News Wire