Investors Seek Out Riskiest Junk-Rated Bonds
By Sebastian Pellejero
Investors' rush into the lowest-rate junk debt has driven yields
to record lows, reflecting Wall Street's thirst for fixed-income
returns and increasing confidence that even struggling businesses
can survive the pandemic.
The yield on an index of triple-C rated corporate bonds settled
Thursday at an all-time low of 6.42%, according to Bloomberg
Barclays data. That was down from 7.4% entering the year. Yields
fall when bond prices rise.
Record-low yields for the worst-rated bonds mark a reversal
after pandemic shutdowns fueled a selloff in riskier debt less than
a year ago. Back then, investors expected many struggling companies
to go bankrupt or default. Credit markets froze, driving yields to
recent postcrisis peaks, particularly for low-rated firms.
Actions by the Federal Reserve, including cutting interest rates
and buying billions of dollars worth of bonds, helped fuel a
recovery in corporate debt. With interest rates near zero,
investors have ventured into riskier assets, including junk-rated
corporate bonds, in search of higher yields. That has helped many
struggling companies refinance their debt at lower interest
Now, the prospect of vaccines and a return to economic normalcy
are powering a recovery in the lowest-rated junk debt, a market
made up of companies particularly sensitive to the economy's
direction. Triple-C rated corporate bonds have so far returned 2.2%
to investors in January, according to Bank of America, outpacing
gains on higher-rated corporate bonds and leveraged loans.
"There is not even a remotely close historical comparison to the
degree of improvement in credit-market conditions to what we have
witnessed here," wrote the bank's analysts in a recent note. At
recent levels, the high-yield market is implying a default rate of
2.1% over the next 12 months, they added, below what many feared
One thing still attracting investors: the additional yield, or
spread, that the lowest-rated junk bonds pay out over benchmark
U.S. Treasurys. On Thursday, investors were getting an extra 5.77
percentage points to hold triple-C corporate bonds instead of
Treasurys, according to Bloomberg Barclays data. That compares to
3.43 percentage points for junk bonds broadly.
Many companies are taking advantage of investors' demand to sell
new debt. High-yield companies have raised more than $33 billion so
far this year as of Thursday, according to S&P Global Market
Intelligence's LCD. That is a roughly 55% increase over the amount
raised during the same period in 2020.
Triple-C-minus rated hospital operator Community Health Systems
Inc. sold more than $1.7 billion worth of junior priority bonds
this week at a 6.756% yield. Outsize demand for the offering
allowed the company to more than double the initial $750 million
size of the sale, while cutting the initial yield offered.
Community Health's newly issued bond due 2029 recently traded at
102.33 cents on the dollar, according to MarketAxess, implying a
Bonds tied to triple-C-plus rated NGL Energy Partners LP rallied
to pandemic-era highs after the company announced a $2.05 billion
bond sale on Thursday intended to repay debt that was coming
NGL's $425 million bond due 2026 recently traded at 80.50 cents
on the dollar, according to MarketAxess, implying a 12.718% yield.
That was up from 73.97 cents on Jan. 19.
Write to Sebastian Pellejero at firstname.lastname@example.org
(END) Dow Jones Newswires
January 22, 2021 14:04 ET (19:04 GMT)
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