Riskiest U.S. Junk Bonds Are Outperforming Just About Everything

The first quarter was a great time to bet on bonds from companies with the weakest credit ratings, as investors prepared for the economy to snap back after the pandemic.

High-yield bonds rated in the CCC tier, usually the lowest-graded bonds that trade, gained 3.58% year-to-date, according to Bloomberg Barclays index total return data. They performed better than leveraged loans, which saw returns of 1.78%, and high-grade bonds, which posted a 4.65% loss. They outperformed mortgage bonds and Treasuries too.

The higher coupons that the securities pay can offer insulation against the sting of rising yields. CCC notes average coupons of 7.7%, compared with 5.9% for high yield debt overall and 3.7% for investment-grade corporate notes, according to Bloomberg Barclays index data.

“The lower quality trade still has some legs,” said Scott Kimball, co-head of U.S. fixed income at BMO Global Asset Management. “Investors typically look to high-yield securities, particularly CCCs, when yields are on the rise. Now, we see record positive revisions for U.S. growth by economists being further boosted by record fiscal stimulus expectations.”

Riskiest U.S. Junk Bonds Are Outperforming Just About Everything

That demand is helping CCC rated companies tap investors for cash. Cetera Financial Group Inc. is expected to complete a $400 million bond offering on Thursday to help finance its acquisition of a Voya Financial Inc. financial planning business. The deal is rated Caa2 by Moody’s Investors Service and an equivalent CCC by S&P Global Ratings.

U.S.

Michaels Cos. launched a $2.3 billion junk bond deal to fund its buyout by Apollo Global Management, with investor calls through April 8.

  • No new high-grade bond deals were launched on Thursday as issuance calmed before the Easter holiday weekend
  • Citigroup says 20%-40% of U.S. CLO managers will incorporate environmental, social and governance factors into new issue CLOs in the next two years, up from 11% last year, according to estimates from analysts led by Maggie Wang
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

Europe

Deutsche Bank AG hired JPMorgan Chase & Co. veteran Sebastian Pearce as head of European high-yield trading, as it boosts staffing in that unit amid a boom in activity.

  • The U.K. is increasing efforts to distance itself from Libor. From Thursday, firms should stop issuing new loans, bonds and securitizations tied to the discredited benchmark, according to the Bank of England
  • HSBC Holdings Plc gained ground in underwriting European bonds this year as the value of deals rose 8%
    • Issuers sold 692.5 billion euros of bonds through March vs. 641 billion euros a year ago
  • Global issuance of sustainability-linked loans totaled at least $77 billion in the first quarter, more than double the same period last year
  • Credit default risk declined in Europe on Thursday for both investment grade and high yield corporations

Asia

Asia’s new dollar bond sales surged in a holiday-shortened week led by Pakistan’s $2.5 billion three-part offering. Some parts of the region including Hong Kong will have public holidays on Friday.

  • New issuance rose by 45% to $8.4 billion this week from $5.8 billion in the previous week, according to data compiled by Bloomberg
  • Pakistan turned to the fixed-income markets after the resumption of a $6 billion bailout program with the International Monetary Fund
    • AIA Group raised $750 million from an offering of Tier 2 notes, while Chinese developers including Jinmao and Logan also tapped dollar debt funding
  • Spreads on Huarong’s dollar bonds widened Thursday morning in Hong Kong after its stock trading was suspended in the city following a delay in the company’s earnings report

©2021 Bloomberg L.P.

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