By Katy Burne
Trading turmoil has dragged junk-bond returns into the red for
the year, according to Barclays PLC data, the latest milestone in a
second-half slump that has started to entice some buyers.
The U.S. Corporate High Yield index, which tracks the
below-investment-grade bonds, lost 0.3% this year through Tuesday's
close.
That is the first time the market has turned negative since
2011, when the debt rallied back to end the year up 4.98%. The last
time junk bonds finished the year in negative territory was in
2008, when junk bonds lost 26% amid a broad flight from risk in the
financial crisis.
Investor jitters have spurred a wave of selling, reversing a
long period of junk-bond appreciation and threatening low-rated
companies' access to the bond market as they look to raise cash for
expansion and acquisitions.
Low-rated issuers have raised more than a trillion dollars in
the U.S. since the financial crisis, as investors hunted down
income-producing securities amid rock-bottom interest rates,
including a record $361 billion of issuance in 2013. Many investors
closely monitor trends in the junk market for broader implications
for stocks and other assets.
Some investors have been scouting for select high-yield bonds
that others have jettisoned with the oil-price slump, in a bet that
the selloff in energy securities won't besmirch the broader
junk-bond market longer term.
Many said they have cash ready to invest after paring their
energy exposures earlier in the year, sensing that a rout in high
yield could disproportionately impact energy bonds.
David Sherman, head of high-yield mutual funds at manager
Cohanzick Management LLC, 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.
"I'm not worried about my Checkers [Drive-In Restaurants Inc.]
bonds" just because oil is down, he said. "I think high yield is
reasonable value."
Energy borrowings had been 5% of the U.S. high yield market as
recently as 2007, but now constitute 14% of the junk-bond market,
according to Barclays data.
Many investors also believe lower oil prices could strengthen
U.S. consumer spending if people find relief at the pump, or
potentially lift gross domestic product by aiding businesses that
use petroleum as an input.
Rocky patches in trading this year, including notable selloffs
in July, October and the earlier part of this month, have slowed
high-yield issuance. Marketwide, junk-debt sales are down 8% from
the comparable year-ago period, according to Dealogic. The last
high-yield oil and gas company to bring a bond deal was SM Energy
Co., which sold $600 million of bonds on Nov. 12 at a rate of
6.125%.
But the pace of the price declines appears to have attracted
some investors back to the market, hoping to pick up bonds at
bargain prices.
J.P. Morgan Chase & Co. said in a research note that the
recent losses are the most severe losses since the Russian default
crisis in August 1998.
The average price on junk bonds is 96.4 cents on the dollar,
down from full face value as recently as Dec. 4 and from 103 cents
in September.
"It seems more stable today," said Eric Gross, credit strategist
at Barclays in New York. "I think this morning we definitely saw
more buying than selling."
The premium investors can earn for holding junk bonds during the
current turmoil is significant by historical standards.
Investors now are demanding 5.52 percentage points above
supersafe Treasurys to own U.S. junk bonds, up from their 3.23
points low for the year in June and the largest so-called "spread"
over Treasurys since late 2012.
Bonds from Chesapeake Energy Corp. due in 2022 traded at 94
cents midmorning Wednesday, up from 92.75 cents at the open of the
session, and from 90.5 cents Tuesday, according to MarketAxess
Holdings Inc.
"The down leg that we have taken has been really brisk," said
Mr. Gross, "but all of that feels very contingent on the price of
oil."
Investors broadly predict only a modest rise in defaults across
the high-yield sector in the coming year and are sanguine about the
health of corporate balance sheets.
In 2009, the U.S. high-yield market returned 58%, and in 2013 it
was up 7.44%.
Write to Katy Burne at katy.burne@wsj.com
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