JUNK BOND SLUMP

In November, prices of high-yield or “junk” bonds fell and saw their sharpest decline in more than a year as investors feared the Omicron virus would disrupt the economy to the degree that risky companies would not be able to repay their loans.
ICE Data Services’ high-yield bond index slumped more than 1 percent last month, its worst month since September 2020 and only the second month this year that the index turned negative.
Bond prices fell so sharply that the loss negated any possible positive yields.
Junk bonds also become less appealing as the U.S. Federal Reserve winds down its monthly bond-buying program, leaving leveraged, high-risk businesses without government props to support them.
Fed chair Jerome Powell’s 30 November comment that the Fed could end its bond purchases sooner than the previously stated date of mid-2022 also sent junk-bond holders to the exits (see related story in this issue).
Bonds of leisure businesses and airlines took the brunt of the losses.
Prices for the lowest-rated bonds, ranked CCC or lower, fared worst, losing a collective 1.4 percent.
Investors yanked $2.8 billion out of junk bonds during the last week of November, according to EPFR Global, the biggest one-week withdrawal since mid-March, when inflation began to worry investors holding risky assets with fixed returns.
Still, yields on junk bonds have changed little from a year ago, indicating that relatively cheap loans may still be available for companies at the edge of solvency, as we noted in “Investors Energize Junk Bond Market Despite Growing Risks” (2 Nov 2021).
TREND FORECAST: We repeat what we said in “Risky Companies Snapping Up Cheap Loans” (23 Feb 2021): the junk bond and leveraged loan markets are gamblers’ games and many of their bets will come up craps when interest rates rise, as they will next year (see related story in this issue).
We also said in “Bond Market Tightens, Junk Bonds in Crisis” (24 Mar 2020) that the “Greatest Depression” will trigger a wave of defaults larger than that of the Great Recession. Bottom-of-the-barrel junk bonds, those rated B3 or lower, made up 38 percent of the junk bond market in July 2019, compared with 22 percent in 2008, according to Moody’s Analytics.
After another year of cheap money, market euphoria, and $250 billion in SPAC speculation, the problem has become enormously worse.
“Investors probably will be surprised at the extent of their losses,” said Oleg Melentyev, a Bank of America investment strategist, in spring 2020. He estimated 29 percent of junk loans will fail when credit tightens again, as the Fed is preparing to do next year, compared to about 20 percent during the Great Recession; and that investors will recover only about 50 cents on the dollar against 58 cents in 2007 through 2009.
They will be lucky to collect even their 50 cents now.