By Katy Burne
Investors pulled nearly $1.9 billion from funds dedicated to
low-rated corporate bonds in the past week, extending a retreat
from risky debt amid a free fall in the price of crude oil.
The outflow is the largest weekly decline since the $2.3 billion
withdrawal registered in the week ended Oct. 1, and follows $859
million that flowed out the week ended Dec. 3, according to fund
tracker Lipper.
Tremors from the slide in oil prices that initially hit energy
bonds are now being felt across the broader $1.3 trillion junk-bond
market, investors and analysts said, causing hesitation among
would-be buyers and a hurried reshuffling of bond portfolios as
funds look to raise cash to meet redemptions.
"Everyone is just selling," said Lane Britain, managing director
at PetroCap, an oil-and-gas fund owned by Highland Capital
Management.
Investors are selling junk bonds at the fastest clip in 18
months, according to data from Barclays PLC, and many are worried
the upheaval could become a catalyst for more lasting weakness in
high yield, particularly if growth slows or individual investors
get spooked and see a reason to pull more of their money.
"Energy is falling out of bed and will drive the entire market
lower," said Riaz Haidri, head of high yield at broker dealer
Cantor Fitzgerald & Co.
The selling constitutes the third major reassessment of
junk-rated debt this year and follows criticism from analysts and
regulators that the yield investors could earn on the debt had
fallen too low.
Previous retreats in July and in mid-October were characterized
by large-scale selling as individual investors pulled their money,
leaving large institutions to buy the debt at deep discounts.
The risk for junk-bond buyers is that the market continues to
stumble and many of those investors remain wary of stepping in too
early, in case the market registers another big decline.
The oil rout has put a dent in issuance volumes, causing a
handful of energy companies to delay or cancel their borrowing
plans. The issuance boom had helped a host of energy companies fund
their business plans by borrowing heavily on the back of investor
demand for higher yielding debt. Energy companies used the reach
for yield among debt investors to line their pockets for new
projects, equipment and acquisitions.But those energy bonds were
sold when commodity prices and energy stocks were riding high,
implying more favorable economics for the energy industry. U.S. oil
prices hit $59.95 a barrel on Thursday, the lowest since July
2009.
The drawdowns signal a growing wariness about owning risky debt,
following a slide in oil prices that has left investors worried
about energy's trickle-down effect on the economy. Energy bonds
constitute 14% of the U.S. high-yield bond market.
This week, even nonenergy high-yield bonds have been hit as
investors rushed to sell whatever debt they could to raise cash.
Goldman Sachs Group Inc. is forecasting further downside in prices
and lingering price volatility.
It is a bad time to see weakness in high yield: Dealer
middlemen, who traditionally cushioned any selling pressure, have
been re-evaluating their willingness to buy and sell bonds for
their clients since the financial crisis and they have been
especially reluctant to step in around year-end, raising costs for
investors trying to complete trades.
In the week following bond market tumult on Oct. 15, dealer
stockpiles of high-yield corporate bonds called "inventories"
dipped below one-fifth of their average for the year, according to
data from the Federal Reserve Bank of New York.
"The high-yield market is not very deep right now," said David
Sherman, head of high-yield mutual funds manager Cohanzick
Management LLC.
Investors are now demanding 5.02 percentage point over
comparable Treasurys to own U.S. high-yield corporate bonds, the
widest spread since June 2013, after the Fed hinted it may raise
interest rates sooner many were expecting.
But some believe the panic is overdone. Mr. Sherman said he has
been reducing his fund's exposure to the energy sector all year but
that the prices in the market are "starting to get interesting"
enough to tempt him to buy again.
Morgan Stanley strategists predict that investors will continue
to reach for yield in 2015, benefiting junk bonds. The firm said in
an outlook piece for next year that it had been cautious on the
debt for most of 2014 because it felt prices had run too high, but
that "given recent volatility, sentiment is much less
complacent."
Gershon Distenfeld, director of high yield at AllianceBernstein
LP, who oversees $35 billion, said he has bought some energy bonds
and sold some.
"People saying all energy is bad and risky. People like us roll
up our sleeves; we are going to differentiate the bad from the good
stuff."
Write to Katy Burne at katy.burne@wsj.com
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