Junk-Bond Carnage Left Half the Market Pretty Much Unscathed

(Bloomberg) -- The four-day rout in junk-rated bonds has left half the market unscathed, even as it frayed the nerves of investors concerned about the froth in corporate debt.

Spreads on the largest group of bonds in the just-below-investment grade BB category, which accounts for 50 percent of the Bloomberg Global High Yield Corporate Bond Index, merely wobbled during the recent bout of weakness. To see more damage, you need to go one ratings category lower, where notes rated B saw their risk premiums widen about 50 basis points to 3.75 percentage points since the start of November, according to the index. 

“Repricing has occurred almost exclusively at the lower end of the ratings spectrum,” JPMorgan Chase & Co. strategists led by Daniel Lamy wrote in a note to clients. They concluded that the junk-bond selloff was about correcting mis-priced credits “rather than a rise in systemic risk.”

That may provide some comfort for investors worried about a big sell-off after years of companies taking advantage of low interest rates to sell their debt at increasingly meager yields for buyers. But it also means they’ll have to decide whether to jump back into a market where spreads are still hovering close to post-crisis lows.

Amid the selloff, bonds with investment-grade BBB ratings saw their spreads narrow as they benefited from a flight to quality. BB-rated bond spreads widened 18 basis points to 2.21 percentage points.

Meanwhile for some of the lower-rated bonds, the slump is not over. Altice NV’s B-rated debt extended declines while the cost of protecting speculative-grade bonds in Europe rose to the highest since Sept. 27.

--With assistance from Neil Denslow

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Cecile Gutscher

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