Junk Bonds Aren’t Feeling the Stock Market Pain
As Stocks Groan Under Pile of Worry, Junk Credit Barely Flinches
(Bloomberg) -- If the violent swings in U.S. stocks are a harbinger of economic gloom and a change in the underpinnings for owning risky assets, someone forgot to tell junk credit investors.
The Bloomberg Barclays US Corporate High Yield Bond Index is down just 1.2 percent from its Oct. 2 peak, while the S&P 500 Index is mired in an 8 percent drop from September’s record high that’s deepening by the day.
“Equities react more harshly to the potential for slowing growth,” Scott Roberts, head of high-yield debt at Invesco Ltd., said in an email. “High yield doesn’t need 3 percent GDP to do well -- we can perform just fine in a 2 percent GDP environment.”
That divergence - which was also seen when stocks swooned in February and in April - differs from the run-up to the global financial crisis of 2008, when credit was at the epicenter of the carnage. This time round, a hunt for higher-yielding securities that are less exposed to rising interest rates is sustaining demand for the riskiest credits, whether that’s in bonds or in leveraged loans. The total return on CCC rated debt this year has now surpassed that of the S&P 500.
“One of the surprises has been that credit markets have not reacted probably as much as they should have,” Guy Stear, who heads credit research at Societe Generale SA, said on Bloomberg Television Tuesday. “When we look at fixed income -- when we have weak growth and concerns about growth, maybe that’s going to be good for the longer end of rate curves.”
The following charts illustrate pockets of resilience and vulnerability in credit markets:
The equity slump and the spike in the Cboe Volatility Index, or VIX, haven’t deterred yield hunters, who’ve been rewarded for buying lower-quality credit. As the Federal Reserve continues to tighten, floating rate is more in demand and the worst-rated leveraged loans are the star performer.
Junk bonds are harder to sell in a hurry than stocks, so relative liquidity may well have helped. But there were some high-yield casualties, particularly in the autos and homebuilder sectors.
Read more: Junk Market Keeps Its Head While All Around Lose Theirs
--With assistance from Gowri Gurumurthy.
To contact the reporters on this story: James Crombie in New York at jcrombie8@bloomberg.net;Sarah Wells in Singapore at smcdonald23@bloomberg.net
To contact the editors responsible for this story: Sarah Wells at smcdonald23@bloomberg.net, Randall Jensen
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