February 3, 2023

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Pressure builds on riskiest corner of US junk bond market

2 min read

US corporate bonds sold by low-rated companies have slumped in price, signalling lenders’ intensifying worries that scorching inflation and higher interest rates are beginning to hit borrowers most vulnerable to an economic downturn.

Bonds assigned a triple C rating or below, the lowest rung on the ratings ladder, have posted a negative return of 2.8 per cent since the end of April, according to an Ice Data Services index. The performance starkly contrasts a 1.3 per cent gain for debt rated double B, the highest quality segment of the junk bond market.

The sharp divergence follows a period of relative outperformance for triple C rated debt, with the change reflecting investors’ souring mood over the outlook for the American economy and the health of US companies that are already beginning to buckle.

Ken Monaghan, a high-yield portfolio manager at Amundi US, said that the sell-off had been particularly severe for companies missing analysts’ expectations for first quarter financial results, mimicking sharp revaluations in the stock market.

“What is clear is that markets — both equity and [corporate debt] — have little tolerance for companies whose earnings ‘miss’ guidance or expectations,” he said. “And there are a fair number of triple C credits that have done just that.”

ATM machine manufacturer Diebold Nixdorf and pharmaceutical company Bausch Health are among a slew of companies to see sharp reappraisals of their debt following earnings.

At the start of the year, corporate bond markets proved more resilient than equities to rising inflation and the Fed’s plan to raise interest rates to fight it. In May, that started to shift, with the decline in triple C debt prices suggesting nervousness over the outlook for these companies, in contrast to higher rated issuers, better able to withstand an economic downturn.

At the end of April, triple C rated debt had lost investors 7.7 per cent for the year but it had still outperformed higher…

2022-06-04 13:00:45

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