Bonds: High Yield

(New York)

Many have been wondering when junk bonds were going to start feeling pain. Despite the previous risk of recession, junk bonds did quite well over the last several months. However, since the big flare up over coronavirus, they have started to be seriously wounded. On Friday, junk bond spreads to Treasuries were at 366 bp—very low. As of yesterday, they were at 418 basis, a 50bp+ rise in two trading days, showing how much investors fear the economic impact of coronavirus.


FINSUM: We think these spreads are going to keep moving higher, even if stocks level out. Bond investors are a suspicious bunch and an economic slowdown would hit high yield companies harder than average.

(New York)

The media is currently doing its level best to scare junk bond investors. There have been many analyst and media warnings lately about the pending fall of high yield bonds (some of which we have featured). Most argue that in an economic downturn, BBB bonds will suffer. Others says there has been no rise in underlying performance to justify the rise in prices. Others have focused on CCCs and their movements. Initially the worry was that CCCs had not rallied like the rest of the market, which was taken as a sign of deteriorating credit conditions. Now the media is warning (see Barron’s) that since they have rallied, it is again a warning sign.


FINSUM: Everything is a warning sign! Our own feeling is that we are generally moving toward a more risk-on environment and the trend for high yield is improving as the economic outlook does.

(New York)

One of the biggest ratings agencies on Wall Street has just put out a stern warning on the junk bond market. Moody’s says that high yield debt may fall “significantly” after a big rally this year. In a quote that captures the general disbelief that has accompanied the junk bond rally this year, Moody’s economist John Lonski says ““High-yield bonds have rallied mightily despite the lack of any observable broad-based acceleration of either business sales or corporate earnings”. Moody’s thinks that if performance of the underlying companies in the space does not improve, then there will be a reckoning, saying ““If the anticipated improvement in the fundamentals governing corporate credit quality do not materialise, a significant widening of high-yield bond spreads is likely”.


FINSUM: Irrational exuberance?

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