Bonds: High Yield

(New York)

Some are very worried a junk bond bear market might be on its way. Not only are rates and yields rising fast, but there has been a huge run up in high yield prices over the years, with a simultaneous surge in bottom rung BBB bonds. However, despite this scary back drop, the market has been doing well and looks set to continue to do so. “The key dynamic in the high-yield market is recession … There’s a possibility of some economic shock that isn’t apparent right now, but you don’t have the classic signs pointing to recession”, says one CIO. High yield’s spread to Treasuries recently touched its lowest point since the Crisis, and in a twist, the lowest rated bonds (CCC) are performing the best this year.


FINSUM: This is quite confounding in many ways, especially considering there have been significant outflows from junk bond funds and investors can get good returns from investment grade.

(New York)

The junk bond sector feels like it is on the precipice right now. After years of great performance, valuations and yields are at lofty levels. At the same time, there has never been more BBB bonds, or bonds just one notch up from junk. All of that means the market looks fragile. However, one of the lesser discussed risks in the high yield market regards a sea-change in accounting practices. Just as with startups, the high yield sector has seen major growth in suspicious accounting practices, such as inflating EBITDA to make debt multiples look lower. Often times this is done on a highly speculative basis that misleads investors.


FINSUM: This is just one of the many growing risks in the high yield market. It seems like the SEC needs to crack down on this sort of creative accounting.

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