#junk bonds

Batman’s Packing Heat

Money has been flooding into bonds all year, as the market looks for a recession that stubbornly refuses to happen. Through May nearly $113 billion net flowed into taxable bond funds according to Morningstar, with market-leading institutions including JPMorgan, Pimco, Charles Schwab, Fidelity Investments, and Amundi, declaring that “bonds are back” after 2022’s historic 16% loss.

High yield bonds, however, should be a different story. Non-investment grade debt typically does well in a strengthening economy, as even poorly capitalized companies benefit from widespread growth. If the market really does anticipate slowing growth and lower rates, junk should be under pressure. It’s not.

Indeed spreads to Treasuries have tightened measurably this year, with non-investment grades yielding only about 4.15% more than the risk-free benchmark. That differential has shrunk by nearly half since a peak in late March when junk bonds yielded 9.2%, compared to 0.7% for Treasuries.

Do high yield investors just have a more positive take on the economy than others? Seems unlikely. And indeed, the issue may be a simple case of supply and demand. Issuance of less-than-investment grade debt is down dramatically, and that supports prices.

High yield issuance peaked in 2020, at $450 billion, and remained near record levels in 2021 ($410 billion), as below-investment grade borrowers rushed to lock in historically low rates. That has allowed many high yield issuers to sit out current, less receptive conditions and wait for potentially lower rates and cheaper financing to come. Issuers that are seeking financing are taking on shorter-term obligations.  Indeed, the Wall Street Journal reports that junk debt’s average maturity has shrunk to 6.1 years, down from a historic norm of 7.4 years.

Issuers that can’t wait for financing are also using another strategy to reduce costs—offering secured loans that provide investors with additional protection in case of default. So far in 2023, around 62% of total non-investment grade issuance has been secured, nearly double the levels in 2022 and 2021.

The sanctions imposed by Western powers to Russian economics can be worse than expected. US and UK announces a ban to crude oil imports from Moscow yesterday. The rating agency Fitch has downgraded Russian bond as junkies bonds in the perspective of default.

This week, Moscow said its bond payments may be affected by sanctions.

"The further ratcheting up of sanctions, and proposals that could limit trade in energy, increase the probability of a policy response by Russia that includes at least selective non-payment of its sovereign debt obligations," Fitch said.

US President Joe Biden said the move targeted "the main artery of Russia's economy".

Meanwhile, the European Union said it will end its reliance on Russian gas.

Indian market may seem to be on steroids, but tread cautiously now

Equity markets worldwide turned choppy this past week, as jittery investors navigated uncertain currents. After a short bout of divergence, the Indian bourses returned to echoing global markets and displayed whipsaw movements in tandem with the overseas peers. Amid fears of a possible global contagion triggered by a probable default by debt-ridden Chinese behemoth Evergrande and the overhang of…