Get Ready for a Junk Bond De­fault Cy­cle: Deutsche Bank

As the price of oil plunged be­low $30, in­vestors rushed to sell debt is­sued by com­pa­nies

The Economic Times - - Commodities Plus -

Ben Moshin­sky

One of the big­gest sources of anx­i­ety among in­vestors at the start of 2016 was the high-yield bond mar­ket. Specif­i­cally, the mar­ket for high-yield (or junk) bonds is­sued by oil and gas com- pa­nies. As the price of oil plunged be­low $30 in Jan­uary and Fe­bru­ary, in­vestors rushed to sell debt is­sued by com­pa­nies who needed ex­pen­sive oil to stay prof­itable. But the tick­ing bomb that peo­ple were ex­pect­ing to ex- plode —a wave of de­faults ri­valling the sub-prime hous­ing crisis of 2008 — hasn’t hap­pened.

In­vestors are about a year early with their con­cerns, ac­cord­ing to a re­port by an­a­lysts at Deutsche Bank, with the de­fault cy­cle for junk bonds ex­pected to peak in 2017 or 2018.

Deutsche Bank says that their US strate­gists have pointed out that US Fi­nan­cial eq­ui­ties have tended to un­der­per­form the S&P500 by 15-20% in the year lead­ing up to the pre­vi­ous three de­fault cy­cles we've iden­ti­fied. They are un­der­per­form­ing the in­dex by around 10% since reach­ing their re­cent peak level in Aug 2015. —Busi­ness In­sider

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