Tags: riskiest | junk | debt | buyers

Riskiest Junk Debt Still Isn't Cheap Enough to Lure Buyers

Riskiest Junk Debt Still Isn't Cheap Enough to Lure Buyers
(Borka-Kiss/Dreamstime)

Friday, 01 November 2019 08:54 AM

The weakest corporate bonds are still too hair-raising for many investors to buy.

Notes rated in the CCC tier, essentially the lowest level in the junk bond market, have grown cheaper since May even as most of the market has grown stronger. Risk premiums, or spreads, on the debt are close to their widest level relative to the tier just above them since mid-2016, according to data compiled by Bloomberg.

The selloff could get worse. Investors including Guggenheim and Voya Investment Management say they are staying away from the debt, even if it pays a juicy yield of 9.3 percentage points more than Treasuries. Factors like the continuing U.S.-China trade war and weakening U.S. economic growth give the debt too much downside risk compared to higher-rated alternatives, they say.

“CCC notes stand out as cheap and no one wants to touch them,” said Randall Parrish, head of credit at Voya Investment Management, which oversees $220 billion.

The weaker performance of the lowest-rated debt underscores how even as investors are reaching for higher returns as the Federal Reserve eases interest rates, they’re still wary of a potential economic downturn and fear that defaults could start to tick higher. The highest tier of junk bonds have gained 13.5% this year, and overall high-yield corporate bonds are up 11.9%, while those rated CCC have gained just 5.7%.

CCC debt doesn’t usually perform like this. Because the companies that sell the notes are already so close to defaulting, CCC bonds are typically hit harder than the broad market during a market downdraft. When the market recovers, the securities often perform much better. The debt plunged in early 2016 when energy prices dropped, but went on to notch huge returns for the year -- 31.5% to the broader market’s 17.1% -- as oil prices started recovering.

This year, CCC bonds are performing worse than the market even as the overall supply of the lowest-rated notes has been shrinking. There are about $156 billion of those bonds outstanding today, down from $167 billion in February. So far this year, CCC rated companies have sold around $24 billion of debt, less than the same period for each of the previous two years, according to data compiled by Bloomberg.

Guggenheim investors led by Scott Minerd said in a note this week that “now is not the right time” to add exposure to CCC debt. The potential downside is big-- the bonds could drop 22%, they said, while in the best case scenario they’ll likely advance 15% accounting for interest and price gains. CCC notes have returned about 6% this year, half as much as the broader high-yield bond market.

That lagging performance has resulted in a growing gap between spreads on CCC bonds and those rated one tier higher, namely in the B range. That differential stood at around 5.5 percentage points on Wednesday, compared with 3.37 percentage points in mid-May. The current difference is close to the biggest since May 2016.

Buying CCC paper now is a gamble because it can drop so steeply when markets fall, said David Norris, head of U.S. credit at TwentyFour Asset Management, which oversees around $20 billion. Now seems like a good time to be prepared for that potential downdraft, he said.

Norris said his firm has been opting to buy relatively safer securities in the BB ratings tier, even if risk premiums on them are lower. Spreads on B and BB bonds have seen the biggest contractions in the corporate credit market this year, with the extra yield on BB bonds reaching a new post-credit crisis low of 1.81% over Treasuries on Monday.

“It’s really been the weaker credits that underperform in that environment,” Norris said. “I don’t think we’re out of the woods yet.”

© Copyright 2020 Bloomberg News. All rights reserved.


   
1Like our page
2Share
StreetTalk
The weakest corporate bonds are still too hair-raising for many investors to buy.
riskiest, junk, debt, buyers
625
2019-54-01
Friday, 01 November 2019 08:54 AM
Newsmax Media, Inc.
 
Newsmax TV Live

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved