US junk bonds notch up best month since 2011

Investors in US junk bonds had their best month in nearly nine years in July, as continued market support from the Federal Reserve bolstered yield hungry investors’ confidence in more precarious companies.

Rising prices and their flipside, falling yields, led to a 4.78 per cent return for the asset class — the best outcome since October 2011, according to Ice Data Services.

The average junk bond yield fell from 6.85 per cent at the start of the month to 5.46 per cent at the end, the biggest monthly drop since May 2009 when financial markets had just begun to rebound from the financial crisis.

Despite the decline in yields, they remained attractive to investors starved of income in safer corners of the bond market, where the average yield on investment-grade US corporate bonds fell below 2 per cent last month.

Expectations of widespread corporate defaults have moderated in the months since the Fed announced sweeping measures to support credit markets, although the number of defaults and bankruptcies has increased. With debt markets remaining open, companies have been able to raise record amounts, strengthening their ability to navigate the economic impact of a wave of Covid-19 infections in the US.

Junk-rated companies have raised more than $150bn through debt markets since the start of April, according to Refinitiv data.

Line chart of (%) showing Yields on US junk bonds sink back below 6%

John McClain, a portfolio manager at Diamond Hill Capital Management, said confidence had been rebuilt since the early days of the crisis, when the Fed stepped in. “I did not expect to be here in March. I didn’t expect to be here in April,” he said. “As we got through May it started to feel like the medicine that was administered to the market was effective.”

The market recovery has been so strong that high-yield bond returns are now only marginally negative for the year.

Investors have poured nearly $60bn into funds that buy US high-yield bonds since late March, according to data from EPFR Global, erasing withdrawals of more than $20bn up to that point in the year.

“We are having a lot of conversations with clients about whether they have missed the opportunity,” Mr McClain said. “I don’t think so . . . Governments across the world want to make sure credit is working properly.”

The long-term survival of many companies remains in question, however, particularly as some state and local governments reverse reopening plans, John Dixon, a high-yield bond trader at Dinosaur Securities, said.

“Although the capital markets have been incredibly accommodating to the airline, cruise line and cinema sector, enabling many companies to raise significant liquidity, it may prove for naught should social distancing remain into 2021,” he said.

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