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.
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.
The market has been very worried about a potential bond market meltdown. Both investment grade and high yield debt have seen major losses lately as fears have mounted about high corporate debt heading into a possible recession and downturn in earnings. One of the big worries is that there will be a surge in BBB (the lowest rung of investment grade) debt that falls into junk status. However, Bank of America is more sanguine, arguing that growth is solid and companies have actually been issuing much less debt, and will continue to do so. Their view is that companies are in a much sounder financial position than before the last crisis.
FINSUM: The debt gorge that happened over the last several years is inevitably going to have consequences, and we think BAML is way too relaxed about the risks.
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.
Everyone is watching the BBB bond market with a very close eye. The bottom fringe of the investment grade market, it saw an extraordinary jump in issuance over the last few years. Now, with rates rising, it looks very vulnerable. However, all that suspicion hasn’t amounted to much as investors have kept the area afloat. Ratings agencies and the IMF have both warned about the startling growth of BBB issuance, but so far, the sector is holding up.
FINSUM: Don’t be fooled. There is a massive amount of BBB debt and when a recession finally arrives alongside much higher rates, there seems bound to be a reckoning. That said, there are pockets of the market, like utilities credits, that seem like they will hold up better.