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Junk bonds are starting to crack as stock sell-off persists

Weakness started in the most actively traded instruments, mainly ETFs and derivatives known as credit-default swaps

Gulf News

New York: After weathering the stock-market turmoil all week, junk bonds are finally starting to show some cracks.

The biggest exchange-traded fund that buys the debt just clocked its worst day in more than a year. Investors pulled money from high-yield bond funds for the seventh week in nine. That’s driving up yields for the market’s biggest borrowers, including hospital chain Community Health Systems Inc, energy company California Resources Corp and rural phone company Frontier Communications Corp.

In Asia, speculative-grade corporate notes are headed for a third week of losses. Average prices of the securities fell to the lowest level since June 2016, according to ICE BofAML Asian Dollar High Yield Corporate Index, after dropping below par this month.

Fund managers aren’t yet panicking. After all, the extra yield demanded to hold US junk bonds instead of Treasuries — at 3.46 percentage points on Thursday for a benchmark Bloomberg Barclays index — is still well below the average of the past five years. But some were concerned that continued pressure could trigger a broader sell-off.

“There’s a point at which you can’t avoid the pressure in equity markets and it starts to bleed through to high-yield” bonds, said Noel Hebert, an analyst at Bloomberg Intelligence.

The weakness started in the most actively traded instruments, mainly ETFs and derivatives known as credit-default swaps, which insure investors against losses. Investors have been snapping up those contracts all week, pushing the cost to the highest since December 2016.

But by Thursday, more and more sales of underlying bonds were starting to populate the bond-price reporting system known as Trace:

Matt Kennedy, a high-yield manager at Angel Oak Capital Advisors, said he’ll be looking to buy the dip on some bonds. “Guys have been coming in showing bids for a variety of names despite the move,” he said. “It doesn’t feel panicky.”