Junkiest debt acts like treasuries as Fed risk stirs up markets

It’s become tough to love bonds these days as investors face the harsh reality of a more hawkish Federal Reserve. Yet, the junkiest junk bonds are holding up relatively well — a sign that, for all the angst in markets nowadays, investors aren’t very worried about the state of the economy.

While investment-grade US corporate bonds have lost 4.9% so far in 2022, junk bonds with some of the lowest ratings — CCC — are down only 3.1%, according to Bloomberg index data. That is almost exactly the same year-to-date return as US Treasuries, widely viewed as the safest securities around, despite their higher risk.

The riskiest corporate bonds tend to be less driven by interest-rate fluctuations and more tied to the general health of the economy and the underlying companies. With default outlooks still at historically low levels, some money managers view them as a good place to park cash for now.

“The economy is solid, earnings are strong, margins are good and defaults are low and expected to remain so,” said Ken Monaghan, co-head of high-yield at Amundi US. “Investors are more worried about rate risk right now than credit risk.”

Even within the junk space, the lowest-rated companies are doing better than the highest-rated ones. Last week, as a worse-than-expected inflation report caused traders to dramatically amp up bets on the size and scope of the Fed’s looming rate-hike campaign, BB rated bonds lost 1.11%; CCCs dipped 0.72%.

CCC bonds may also be doing better as a consequence of investors removing money from funds. When high-yield mutual funds or exchange-traded funds experience outflows — as they have recently — fund managers must sell some of their holdings to pay back investors. Debt with higher ratings, namely BBs, tend to be easier to offload in these cases, potentially buoying CCC prices.

US high-yield funds have posted five straight weeks of outflows. And some major ETFs have seen their prices fall. The SPDR Bloomberg High Yield Bond ETF (JNK) has slumped 5% this year, while the VanEck Fallen Angel High Yield Bond ETF (ANGL) and iShares US Fallen Angels USD Bond ETF (FALN) are down 7% and 6.4%, respectively.

“The ETFs sell indiscriminately, and there have clearly been big investor rotations selling out of ANGL and FALN which has exacerbated pressure on BBs given they are more than 50% of the market in general,” said John McClain, a high-yield portfolio manager at Brandywine Global Investment Management.

Elsewhere in credit markets:

Americas

Banks led by Barclays Plc wrapped up a loan offering Monday for Apollo Global Management’s Covis Pharmaceuticals Inc. after the deal struggled for weeks to attract investors, according to a person with knowledge of the matter. The banks offered steep discounts to investors to offload the debt, which came to market during a volatile period. Investors also balked at how more than 60% of the company’s revenue came from three drugs that each face headwinds.

• Amid global markets volatility, Invesco is cautious on U.S. high-grade credit, ramping up cash holdings and buying floating-rate notes
• US junk bond losses are picking up speed, capping last week with the biggest one-day setback in 16 months as inflation makes the sector less and less attractive
• A measure of high-grade corporate credit risk fell as stocks pared losses after Russia signaled it’s open to a diplomatic solution to a crisis that’s raised fears about a Ukraine invasion
• For deal updates, click here for the New Issue Monitor
• For more, click here for the Credit Daybook Americas

EMEA

Primary bond issuance is expected to stay muted this week following geopolitical turbulence and two pulled sales last week, as investors reassess risk appetite for credit globally.

• The increased volatility could increase demand for havens such as sovereign debt and market participants are expecting the SSA sector to lead issuance for a fourth straight week
• Europe’s rescue fund ESM sent a request for proposal to banks for a possible transaction, while Slovenia is considering issuing euro-denominated notes subject to the results of a tender offer

Asia

Asian dollar bond deals had a slow start Monday as global yields traded firm after a volatile week.

• Investors were also eyeing oil’s surge toward $100 a barrel
• China-based issuer, Beijing State-owned Capital Operation & Management is the sole firm to advance deal plans so far Monday, with the announcement of a mandate for a potential euro-denominated note
• Zhenro Properties Group Ltd. dollar bonds extended declines Monday after plunging last week on concerns about the planned redemption of a note