normalization
It’s hard to overstate the easy-money conditions that allowed U.S. high-yield bond markets to thrive the past eight years. The debt has returned more than 14 percent on average every year since 2009 as the Federal Reserve dropped overnight rates to near zero and bought billions of dollars of bonds. Junk-bond yields are still three percentage points below the two-decade average, but the Fed is raising rates at a faster pace and other central banks are hinting they may reduce stimulus in the near future.
Investors are increasingly scrutinizing specific companies and rejecting their bonds when they see a problem. Alongside the earnings-driven sell-offs at Community Health and IHeartMedia, mega-deals from Staples Inc., Tesla Inc. and Netflix Inc. have traded below their face value. Tesla’s benchmark bond fell to a new low of 93.5 cents on the dollar Thursday, according to data from Trace.
It’s hard to overstate the easy-money conditions that allowed U.S. high-yield bond markets to thrive the past eight years. The debt has returned more than 14 percent on average every year since 2009 as the Federal Reserve dropped overnight rates to near zero and bought billions of dollars of bonds. Junk-bond yields are still three percentage points below the two-decade average, but the Fed is raising rates at a faster pace and other central banks are hinting they may reduce stimulus in the near future.
Investors are increasingly scrutinizing specific companies and rejecting their bonds when they see a problem. Alongside the earnings-driven sell-offs at Community Health and IHeartMedia, mega-deals from Staples Inc., Tesla Inc. and Netflix Inc. have traded below their face value. Tesla’s benchmark bond fell to a new low of 93.5 cents on the dollar Thursday, according to data from Trace.
“It feels like it’s spreading,” Mike Collins, senior investment officer at PGIM Fixed Income, said in an interview. PGIM has been cutting its exposure to high-yield debt since the beginning of the year, especially BB rated companies.
The telecom sell-off that was exacerbated by failed merger talks between Sprint Corp. and T-Mobile US Inc. has slowly crept into health-care bonds and the broader high-yield market as investors try to cash out before it’s too late.
“It’s only the beginning,” said Jack Flaherty, a portfolio manager at GAM Holding AG who’s been buying better-graded bonds to hedge high-yield risk. “We’re starting to see a welcome correction,” he said in an interview.
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