Risky Bonds Join Everything’s Rally | Stock market news – Mint

The premium that investors demand to hold lower-quality corporate debt over relatively safe Treasuries has declined to near pandemic levels, a sign of waning concerns about an economic slowdown that would cause a sharp increase in payment defaults and bankruptcies.

Lower-rated debts were swept away in a broad market rally fueled by signs of slowing inflation and hopes of lower interest rates. Lured by yields of around 8%, investors have pumped a net $3.7 billion into junk bond funds so far this year, according to Refinitiv Lipper – the first capital inflows during this period since 2020.

That demand has spurred bond sales from companies such as Jack Dorsey’s Block and Carl Icahn’s Icahn Enterprises in recent weeks. Collectively, low-rated companies have issued $131 billion in junk debt this year through mid-May, according to PitchBook LCD, compared to about $71 billion during the same period in 2023.

Investors and analysts watch junk bonds closely because companies with lower credit ratings tend to be hit first by economic problems. Strong demand there – along with the recent rise in S&P 500 company profits – are bolstering hopes that the economy will calm down enough for rates to fall, without falling into a recession.

“Markets continue to believe there will be a soft landing,” said Matt Brill, head of North America investment grade credit at Invesco. “Overall returns are encouraging buyers to invest, and there are few concerns about a downturn in the economy.”

Bonds of all kinds are rebounding after three straight months of higher-than-expected inflation data roiled markets, denting investors’ hopes for lower interest rates. Now, signs of slowing price increases have revived bets that the Federal Reserve could cut rates more than once this year, according to CME Group data.

Many companies are taking advantage of investor demand to refinance their existing debts. SS&C Technologies, which provides software for the financial services and healthcare industries, recently issued $750 million in bonds maturing in 2032 to help repay floating rate debt that was maturing as early as April 2025 .

Thanks to higher underlying interest rates, the bonds sold for a yield of 6.5%, a percentage point higher than the initial yield of the company’s older bonds issued in 2019. Nonetheless , the premium, or spread, over Treasury bonds was 1.91 percentage points. or one percentage point lower than the initial spread on bonds sold in 2019. This suggests that investors viewed the new bonds as less risky than the old bonds when they were first issued.

SS&C Technologies’ refinancing effort also included a $3.9 billion loan, larger than initially expected due to stronger-than-expected demand from investors.

“We saw an opportunity in the timing of the refinancing,” said Brian Schell, chief financial officer of SS&C Technologies. In the past, the company primarily used debt to finance mergers and acquisitions.

At the start of the year, Allied Universal, a provider of installation and security services, had about $1.9 billion in secured debt maturing in 2026. In February, the company refinanced $1 billion dollars of that debt, extending its maturity to 2031. Most recently, it tapped the bond markets again for $500 million after seeing a weaker-than-expected jobs report and persistent tightening of spreads.

“It was an opportunistic move for us,” said Lasse Glassen, global head of communications and investor relations at Allied Universal. “We took advantage of good conditions.”

Signs of stress are hiding. The default rate reached 5.8% among junk bond issuers in the 12 months through March, its highest level in three years, according to an analysis by Moody’s Ratings. This figure includes bankruptcies and amicable debt restructurings.

The rise reflects continued financial woes at some private equity firms that have struggled to refinance their debt at today’s higher rates, said Julia Chursin, a senior analyst on the Effect Finance team. leverage and private credit from Moody’s.

Telecommunications and media companies, which face challenges such as cord cutting and the shift to streaming services, are among the sectors most at risk, she said.

“We’re in a good environment where everyone wants to earn a little more yield and take a little more credit risk, but credit risk is increasing,” said Kevin Loome, a high-yield portfolio manager at T. Rowe Price.

However, technical factors could keep high-yield bond spreads relatively low. In recent years, more companies have entered or returned to the investment grade, while fewer companies have fallen into the waste category. This reduces the supply available to investors, analysts said.

“It’s more money for the same amount of paper in circulation, and it’s also been very supportive of market valuations,” said Michael Anderson, head of U.S. credit strategy at Citigroup.

Sam Goldfarb contributed to this article

Write to Vicky Ge Huang at [email protected]