Investors’ ravenous appetite for higher-yielding assets is boosting some of the riskiest classes of bonds that have so far trailed behind a broad rally in corporate debt.
The additional yield above US government debt on corporate bonds with a triple C rating or lower, placing them near the bottom of the ladder, has fallen more than 1 percentage point to 12.38 percentage points over the past month, pushing the price of the bonds higher, according to Ice Data Services. The debt has done much better than the wider high-yield bond market, often referred to as “junk”, where the average spread has dropped 0.45 percentage points to 5.34 percentage points.
It is a sign that yield-hungry investors are beginning to venture down to the very riskiest companies that have underperformed since the market trough in March, and still offer the potential of juicy returns. S&P Global, one of the big three rating agencies, considers triple C issuers to be “vulnerable”, and dependent on “favourable” conditions to keep paying their debts.
However, investors are willing to take their chances because the yield on triple C and lower rated bonds remains much higher than corresponding US Treasuries — or even double B-rated bonds that sit at the top of the junk pile, and offer just 3.7 percentage points over government bonds.
“The higher quality companies are simply not providing the yield,” said Tom Ross, a portfolio manager at Janus Henderson. “For fund managers that want to outperform you have to do the credit work and really try to understand some of these lower rated companies.”
When the US Federal Reserve announced in March it would begin buying corporate bonds, it swiftly reversed the coronavirus-induced sell-off and prompted a flood of new issuance from companies eager to raise cash to see themselves through the pandemic.
Strong demand from investors helped to push prices up and yields down. As the returns on offer for top-quality debt have shrunk, investors’ focus has shifted to lower-quality bonds, allowing some of the best-rated companies in the junk market to secure ultra-cheap funding.
Double B-rated aluminium can maker Ball Corporation, for example, clinched the lowest-ever borrowing cost for a US junk-rated company last week, paying just 2.9 per cent on a $1.3bn 10-year bond. That compares with a coupon of 9.5 per cent on a $500m five-year bond sold by triple C-rated Seaworld Entertainment, the theme parks operator, at the end of July.
“We look across the globe and it is hard to find yield,” said Brian Robertson, a high-yield portfolio manager at Pacific Asset Management. “Assuming a reasonable economic backdrop we think there could be more interest in lower quality triple Cs.”
Analysts at Bank of America last week recommended investors look to overweight triple C-rated bonds — meaning, buying more than the index run by Ice Data Services — for the first time since the coronavirus outbreak ripped through financial markets.
The analysts noted that these lower reaches of the market are now one of the few areas “with any air left to perpetuate the insatiable bid for risk”.
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Yield-starved investors start to rummage in triple C-rated debt - Financial Times
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