Displaying items by tag: high yield

Friday, 12 June 2020 13:44

Investors are Piling into the Riskiest Debt

(New York)

Big debt investors are pouring dollars into risky debt markets and products, such as CLOs and their subprime-backed assets. Why you may ask? (as anyone might right now) The answer is that the riskiest borrowers are surviving this downturn much better than anyone expected. Spreads between subprime-backed products and US Treasuries have narrowed sharply, while new deals have seen big demand. According to an analyst at Loomis Sayles “What is surprising is how strong credit performance has been … Fiscal policy is really keeping the subprime borrower afloat”.


FINSUM: Regardless of whether or not you are involved in this market, it is good news that the demand for these securities is actually being driven by fundamentals. It is both a sign of economic resilience, and also of market rationality.

Published in Bonds: High Yield
Tuesday, 17 March 2020 08:02

Massive Bond Downgrades Coming

(New York)

We look like we are on the brink of a big downgrade in bonds that could spread chaos across the fixed income markets. Big rating agencies have not taken concrete steps yet, but investors have been assuming they will, as yields on BBB rated bonds have jumped, with $300 bn now above the 6% threshold. Many high-yielding companies, like airlines and cruise lines, have seen their yields skyrocket. According to Wells Fargo, “As the probability of a recession rises, so does the potential for downgrades and defaults, leaving us unwilling to wave the white flag for corporate credit”.


FINSUM: The downgrades are inevitable at this point, but at least the market has already been adjusting, so it will be less chaotic when it happens.

Published in Bonds: IG
Wednesday, 26 February 2020 15:50

Junk Bonds are Hurting on Coronavirus Fears

(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.

Published in Bonds: High Yield
Monday, 23 December 2019 09:37

Junk Bond Markets Might Get Spooked

(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.

Published in Bonds: High Yield
Friday, 20 December 2019 14:09

Moody’s Puts Out Major Junk Bond Warning

(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?

Published in Bonds: High Yield
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