Yields on U.S. junk-rated bonds have fallen below 3 percent, making it cheap and easy for companies tilting toward insolvency to borrow money.
Centene Corporation, a health insurance company, sold a $2.2-billion bond last week at an interest rate of 2.5 percent, saving it an estimated $40 million a year in interest payments.
Last month, homebuilder MDC Holdings landed the same rate and term on a $350-million bond sale.
Also last month, T-Mobile sold a $1-billion, five-year bond at 2.25 percent, a record-low rate for a recently low-rated company.
“A 3-percent yield is just ludicrous,” Tom Krasner, cofounder of Concise Capital Management, commented to the Financial Times. “We never would have imagined buying things at a 3-percent yield in our entire career.”
According to the FT, some observers have expressed worry that record low junk-bond yields fail to compensate junk-bond investors for the extra risk they face if the economy takes longer to recover than hoped. That would hobble corporate earnings and could squeeze corporations facing hefty bond payments.
At the moment, “Everyone has the same [sunny] view and there is so much money chasing this rally,” Philipson noted. “There is such a reach for yield.”
TRENDPOST: Across the globe, it’s the same pitch. The more vaccines injected in the arms of people, the longer the Feds keep interest rates low, the more cheap money they pump into the markets, and the longer they continue to buy up bonds… the lower the risk of buy junk-bonds from high-risk companies.
Again, we forecast there will be a sharp economic bounce back, but it will not expand across the economic spectrum. Thus, those companies deep in junk-bond debt will decelerate, especially as interest rates rise and their business prospects for recovery decline.
