Bonds: High Yield

(New York)

The junk bond market is going through an eye-opening drought. Not one company under investment grade has issued a bond since November, the longest spell of this kind in more than two decades. Investors are worried over the economy and market volatility, which has basically shut down any new issuance. It has now been 41 days since a junk bond sale, the longest period since 1995. December was the first month since 2008 without a junk bond sale.

FINSUM: When credit starts to get ugly, investors would be wise to pay attention. The question is whether this is just a short-term hiatus or a sign of worse things to come.

(New York)

While the stock market is getting all of the attention, the bond market is experiencing a lot of turbulence as well. The riskiest corners of the debt market, including junk bonds and loans, are on pace for their worst month since the US downgrade in August 2011. High yield’s spread to Treasuries has surged a whopping 110 basis points since the start of the month, and unlike in stocks, there aren’t signs of a rebound. The average yield on the index is 8%.

FINSUM: It is reasonable to be nervous about credit right now given the huge volume of issuance in recent years and the pending threat of a recession and accompanying earnings slowdown.

(New York)

In many ways credit markets are a major bellwether for both the economy and the stock market. And right now, they are sending some poor signals. Investors are afraid of rate hikes and money managers are refusing to bankroll buyouts. As a gauge to how brutal the environment is, consider this: not one company has borrowed in the US high yield market this month! A strategist from Janney Montgomery Scott put the current market environment in perspective: “This is clearly more than year-end jitters … What we’re seeing now is pretty typical for end-of-credit-cycle behaviour”. Yields on junk bonds have climbed over 100 basis points since mid-September.

FINSUM: Junk bonds are likely feeling more heat from the worries about a recession and weakening of earnings (in light of high indebtedness) than they are interest rates.

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