Cracks are appearing in the U.S. junk-bond market, as the country heads into the end of the year without additional stimulus to support the still-growing ranks of unemployed Americans.
Investors are still withdrawing money from the largest junk bond exchange-traded fund at the quickest pace since the start of the coronavirus pandemic. Since Monday’s $1.1 billion outflow, they have withdrawn an additional $1.2 billion from the
iShares iBoxx $ High Yield Bond ETF
The ETF’s price is down 1.7% for the week through Thursday morning, compared with the
Performance has been somewhat better in the cash market for high-yield bonds, which has declined 1% this week through Wednesday. But the performance of the underlying bonds and sectors hint at investor concerns about the potential for future economic trouble caused by the coronavirus, as case counts in Europe and New York increase again.
The worst-performing bonds in the ICE BofA high-yield index this week have been in virus-sensitive sectors. And the sectors posting the worst overall performance were department stores, health facilities, theaters and entertainment, leisure and travel companies, energy producers, and airlines.
Acute health-care provider
Community Health Systems
’ (CYH) second-lien bond maturing in 2023 (CUSIP: 12543DAZ3) had the second-worst performance in the ICE BofA index Wednesday, which includes 1,996 securities. The bond’s yield spread widened by 4.8 percentage points. It is still trading 81 cents on the dollar, however, well off its March lows of 68 cents. The company’s four-year bond (CUSIP: 12543DBA7) was its most actively traded security Wednesday, according to data provider BondCliQ, and lost 5.1%.
(M) two-year bond (CUSIP: 55616XAF4) was the seventh-worst performer in the index Wednesday, according to ICE BofA Indices, with its yield spread over Treasuries widening by 1.5 percentage points. BondCliQ finds that the department store’s five-year bond (CUSIP: 55616PAA2) was most actively traded, and that the security lost 2.4%.
The eighth- and ninth-worst performers were both issued by cruise operators, according to ICE. A two-year bond (CUSIP: 780153AU6) from
(RCL) saw its spread widen by 1.5 percentage points, and the spread on a four-year bond (CUSIP: 62886HAP6) issued by
Norwegian Cruise Line Holdings
(NCLH) widened by 1.4 percentage points.
What’s more, a high-yield bond sale from a natural-gas company called Aethon United BR LP was pulled, according to Bloomberg, the first time a deal has been withdrawn since July.
Fund managers could simply be reversing bets that a vaccine will boost growth before the end of this year, so Wednesday’s market turbulence doesn’t necessarily guarantee a future meltdown.
But the ETF outflows may still give investors pause.
Outflows tend to occur before bond markets sell off, because they are more liquid than underlying securities. That happened before the pandemic as well; the pre-pandemic outflows from the iShares iBoxx High Yield ETF peaked on Feb. 28, and the worst of the selloff started on March 4.
To be sure, because the Federal Reserve has cut interest rates and bought Treasuries for stimulus, there isn’t as much financial pressure created by declines in bond markets (and corresponding increases in bond yields). As of Wednesday, the implied borrowing costs for junk-rated companies—the market’s yield—was around 5.8%.
Those relatively low yields could be why the high-yield bond market could still set a record for issuance this week, even with the pulled deal. On Wednesday,
(CVNA) sold $1.1 billion of bonds, increasing the size of the bond despite the pressure on the broader market, according to Bloomberg.
Broadly, however, the ultimate arbiter of risky markets’ performance will be economic growth. That could rely on stimulus from Washington, and Wall Street is beginning to write off the possibility of any additional aid before 2021—even as job losses continue.
So strategists like Peter Tchir from Academy Securities are hesitant to get too bullish, even with cheaper valuations for stocks and high-yield bonds.
“It is still too early to commit to buying this dip in stocks and corporate bonds,” he wrote in a Thursday note. “There is no single big reason to be bearish, but there are lots of little reasons to be cautious and when added together, those signal for more downside risk to markets.”
Write to Alexandra Scaggs at [email protected]