Relative yields on US junk bonds jump to five-week high
Investors are pushing back against the riskiest debt on concerns over rising energy and food costs
Dubai: The rally in high-yield debt that fostered the biggest ever refinancing boom is showing signs of faltering as relative yields on US junk bonds jump to a five- week high and leveraged-loan prices slump to a two-month low.
The extra yield investors demand to own speculative-grade debt instead of Treasuries jumped 19 basis points, or 0.19 percentage point, to 488 basis points last week, up from the low this year of 452 on February 21, Bank of America Merrill Lynch indexes show. The Standard & Poor's/LSTA US Leveraged Loan 100 Index fell 0.49 cent last week, the biggest drop since July, to 95.35 cents on the dollar.
Investors are pushing back against the riskiest debt on concerns that rising energy and food costs and political turmoil in North Africa and the Middle East will slow growth. Swift Transportation Co., the biggest truckload carrier in North America, and Advantage Sales & Marketing Inc. cancelled plans last week to refinance debt with new loans as JPMorgan Chase & Co. lowered its growth forecast for the US economy. JPMorgan's chief US economist Michael Feroli reduced his first-quarter estimate for growth to an annualized pace of 2.5 percent from 3.5 per cent, according to a March 11 note to clients.
Largest market
After returning 88 per cent since the end of 2008, gains in US junk bonds, the largest market for such debt, are poised to underperform investment-grade securities this month for the first time since November with returns of 0.01 per cent versus 0.2 per cent.
High-yield, or junk, debt is rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.
Elsewhere, in credit markets, the extra yield investors demand to hold corporate bonds rather than government securities rose last week after reaching the lowest in more than 10 months.
Corporate bond sales soared to the highest in eight weeks, while the cost of protecting company securities from default in the US and Europe climbed.
Spreads on company debt from North America to Europe and Asia widened two basis points to 151 basis points, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index. The yield gap has tightened 18 basis points this year and touched 148 basis points on March 8, the narrowest since April 27, the data show.
Yields fell to an average 3.934 percent from 4.003 a week earlier, Bank of America Corp. data show. The Barclays Capital Global Aggregate Corporate Index of bonds has gained 0.85 per cent this year.
