Bonds: High Yield

(New York)

If the Fed isn’t stimulating high yield bonds, then they might be highly risky and extraordinarily overpriced. High yield bonds spreads have narrowed significantly versus Treasuries in recent months, a very odd move given the worries about the economy (which usually hurt junk bonds). Some think the Fed may be buying such bonds, which would drive prices up and yields down. Spreads are down 110 basis points this year.


FINSUM: If everyone was so worried about the economy—which would usually push Treasury yields down and junk bond yields up—then how could spreads have narrowed between the two? Something smells wrong here.

(New York)

One corner of the bond market, or rather credit market, is having a tough time and it may be a negative sign for the rest of fixed income. CLOs, or collateralized loan obligations, which have been a star for several years, recent tumbled. In aggregate, CLOs dropped 5% in October, and those close to the market see more volatility to come. According to Citigroup “We think there’s more volatility coming … We recommend investors reduce risk and stay with cleaner portfolios and better managers”. CLOs are a key funder of the leveraged loan market, and weak demand there can flow through to boost borrowing costs to all corporates.


FINSUM: This is akin to a warning coming out of the high yield market, as what it reflects is worries about how leveraged companies might handle a downturn.

(New York)

There is serious trouble brewing in the riskiest corners of the debt market. The lowest rated group of corporate bonds have seen their yields rise for months as a host of factors are causing losses. Whether it be the switch to ecommerce, poor energy prices and renewables, or prescription drug regulations, companies across multiple sectors have been getting hammered. The problem is that the issues hurting these CCC rated companies are not just isolated to them, the move in sentiment and selling is spreading to the broader high yield and speculative loan market. More companies are being downgraded too, and default rates are picking up.


FINSUM: Rather than a panic, this is a broad-based and fundamental move away from risky debt. It may not lead to huge losses—yet—but expect spreads to keep rising.

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