The prospect of imminent higher interest rates has spun the world’s junk bond markets into turmoil, with overborrowed companies facing higher costs to refinance debt and other businesses seeking new financing seeing their prospects dim.
In the U.S., new sales of high-yield or “junk” bonds have fallen 45 percent, year over year, Bloomberg reported; in Europe, sales in January were cut in half.
U.S. junk bond funds shrank by $2.8 billion during the week ending 26 January, the third consecutive week of outflows exceeding $2 billion.
“We are now facing the reality of a much more hawkish Fed that will withdraw liquidity faster than expected,” David Knutson, Schroders’ chief of U.S. fixed income products, told Bloomberg.
“This has curtailed demand in the riskier parts of the market as they will be impacted first,” he said. “The balance between borrowers and lenders is starting to turn in favor of lenders.”
ION Analytics, a financial data firm, cut in half the size of its recent bond sale. The Italian soccer team FC Internazionale Milano SpA had to settle on an interest rate of 6.75 percent to refinance debt that had been costing it 4.875 percent.
Covis Pharmaceuticals Inc. may delay its $850-million bond issue, which had been targeting a 7-percent interest rate.
Buyouts funded by high-interest bonds also are expected to shrink in number.
The change in market is pushing some companies, such as Fertitta Entertainment, to turn their backs on bonds and take on debt through loans, where rates and terms can be more favorable, Bloomberg reported.
Yields on CCC-rated bonds, among the riskiest, leapt by half a percentage point or more during January’s third week to average 7.62 percent, the highest in two months. Better-grade B-rated issues saw yields move to a 15-month high average of 5.53 percent, Bloomberg data showed.
“We’re entering into a more skeptical era now and fixed-rate investors are much more price sensitive and cautious, especially on the lower quality names,” Ben Thompson, co-director of leveraged finance in Europe for JPMorgan Chase, said to Bloomberg.
“The lesser-known companies, or ones with history, will be a harder sell this year based on what we’ve seen so far,” he added.
TRENDPOST: In articles such as “Will Junk Bonds Turn to Junk?” (14 Dec 2021), we have repeatedly warned that when interest rates are poised to rise, junk bonds will be among the first facets of the financial market to tumble.
Their slide has begun and will continue, barring unforeseen external factors, until interest rates level off.