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The value of U.S. corporate junk bonds, those trading for 70 cents on the dollar or less, has almost doubled this year, reaching $27 billion at the end of April, compared to $14 billion at the end of last year.
Another closely-watched signal of trouble is if yields on a company’s bonds rise 10 points or more above those for U.S. treasury securities.
For example, tech firm Diebold Nixdorf’s 2024 bonds drew yields of 10 percent when April began; the bonds were fetching 27 percent last week, compared to treasury returns around 3 percent.
Pharmacy chain Rite Aid’s yield on bonds due in 2026 have risen from 7.3 percent at the end of last year to about 13 percent last week.
A “junk” rating indicates that a business might not be able to pay its debts. A growing number of junk bonds signals potential trouble ahead for the broader economy.
More corporate bonds have slid into junk status this year as investors have fled from risk and sought safer stores of value amid steadily rising interest and inflation rates and uncertainties wrought by the Ukraine war, the Financial Times noted.
The ICE Data Service’s junk-bond index has fallen 3.6 percent this year, the junk bond’s worst performance since the COVID virus struck in March 2020.
The amount of so-called “distressed debt” is still low but “starting to move up and I would expect it to continue to rise” as climbing interest rates push more businesses into distress, Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, told the FT.
“That’s significant,” he said.
TREND FORECAST: We repeat the warning we issued in “Will Junk Bonds Turn to Junk?” (14 Sep 2021): Junk bonds were in trouble as soon as the Fed laid out a timetable for ending its bond-buying spree and raising interest rates.
Now that the Fed is doing both, junk bonds’ price slide will become steeper through the weeks ahead.
In any market correction, junk bond funds will be an early casualty and among the last segments of the market to recover.