Trashing of junk bond market intensifies
It was the worst day on the junk- bond market in more than five years, Monday, with prices pushed by a downdraft of low oil prices, a looming interest rate hike in the United States and yet another closure of a high- yield fund. A c onfi dence- shattering tweet from widely followed investor Carl Icahn didn’t help either.
Monday’s bloodletting, the latest in a rout that began last week, saw units of SPDR Barclays High Yield Bond ETF, slide US$ 0.27 to US$ 33.42 on Monday, their lowest close since March 2009.
The popular ETF, which is so much a proxy of the junk bond market that its ticker is JNK, has fallen about four per cent over the last week alone.
Also down four per cent over the past week are units of iShares iBoxx High Yield Corporate Bond ETF, which trades as HYG. They closed at US$ 78.83 on Monday, down US$ 0.69, their lowest since August 2009.
The sell- off only further fuelled the mounting prophecies of gloom from notable investors, among them the hedge- f und tycoon Icahn, who warned on Friday the junk- bond market is in for much more trouble.
“Unfortunately I believe the meltdown in High Yield is just beginning,” he said on Twitter.
The question is whether the meltdown in the high- yield market foreshadows nastier events to come in U. S. equity markets. More likely it’s saying something about the health of just a certain type of sector. Compare the slump in junk bonds with broader market indexes: The S& P 500, which consists of U. S. companies of various sizes and sectors with a broad mix of credit grades, has been relatively flat so far this year. The junk- bond or high- yield debt market, by contrast, is mostly made up of smaller firms, most of them in the commodities sector.
The virtual certainty that the U. S. Federal Reserve will raise short-term interest rates Wednesday, the first increase in nine years, will already hurt the attractiveness of bonds. But it’s a rate hike that markets have been expecting for weeks, if not longer.
Most say the sudden flight from junk bonds has more to do with the quake sent through markets last week by New York fund manager Third Avenue Management. The company announced last week that it was blocking redemptions for its US$ 789- million high- yield Focused Credit Fund until it could liquidate the assets and return the proceeds to investors over the next year. On Monday, Third Avenue’s long- time CEO David Barse left the company.
But some argue the fear that the fund’s failure sent through the market is an overreaction, since the fund’s portfolio was heavily made up of low-credit-quality assets — not just junk bonds, but high-risk bank loans and unrated securities of companies in financial peril — was not representative of the creditworthiness of the broader high- yield mutual fund sector.
“The market is sensitive to creditnegative events and can overreact,” Christina Padgett, senior vicepresident of Moody’s Investors Service in New York, said.
“However, it is not surprising that a fund with a concentration in very weak credit fundamentals and potentially overexposed to commodities could find itself in a very challenging position.”
But on Monday, Lucidus Capital Partners, a six- year- old high- yield credit fund, also said it would liquidate its entire portfolio and return US$ 900 million to investors. That comes after Stone Lion Capital Partners L. P. said Friday that it would bar redemptions on its credit hedge fund.
Economic events are taking their toll on companies with high- priced debt. In the 12 months leading up to the end of November, the global default rate for speculative-grade debt reached 2.9 per cent, according to Moody’s. That was up from a rate of 2.7 per cent for October, and it exceeded a year- ago prediction of 2.6 per cent. Moody’s forecasts the global default rate will reach 3.0 per cent by the end of 2015, and rise gradually to 3.7 per cent by November 2016.
Commodity companies, most of them in the oil and gas sector, are responsible for more than one-third of the defaults. Already-low oil prices slid further this month as the Organization of Petroleum Exporting Countries (OPEC) failed to address a growing supply glut. U.S. Crude fell as low as US$34.53 a barrel Monday before bouncing back to close at US$ 36.31, up 1.9 per cent.