Investors have started to shy away from riskier corporate bonds in the United States, as the amount of debt trading at distressed levels has doubled since the start of the year.
The value of junk bonds trading at 70 cents on the dollar or less, seen as a sign of distress and a warning that a company may struggle to repay debt, soared to $27 billion from around $14 billion dollars at the end of 2021, according to FT calculations based on a widely watched index run by Ice Data Services.
The increase reflects a more hawkish Federal Reserve, which first raised interest rates in March and is expected to do so again on Wednesday, the start of an expected round of rate hikes aimed at tackling US inflation. .
The central bank pivot also comes with war in Ukraine and slowing global growth, clouding the picture for more indebted companies that may struggle to refinance borrowings at higher interest rates.
Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, said that while the amount of debt transactions at distressed levels remains low, “it’s starting to rise, and I expect it to continue to rise. This is significant.
Further monetary tightening from the Fed will push more debt into the troubled area, he added.
The accumulation of distressed debt stock comes after the worst month for the US high-yield bond market since the pandemic-triggered sell-off in March 2020, with a widely followed Ice Data Services index down 3, 6% in April.
According to data from UBS, another measure of distress – the share of trade in debt with a yield of 10 percentage points or more above equivalent US government bonds – has also increased, led by companies. consumption and communication.
Retail technology company Diebold Nixdorf’s bonds maturing in 2024 fell sharply in April, taking its yield from around 10% at the start of this month to 27% on Tuesday.
The yield on drugstore chain Rite Aid’s $850 million bond maturing in 2026 has risen all year, hitting nearly 13% on Tuesday, from around 7.3% at the end of 2021.
Some investors remain optimistic about the risks ahead, noting that many lower-rated companies have seized the opportunity to raise funds, extending the maturity of their debt and making them less dependent on fresh money.
However, UBS analyst Matt Mish noted that the number of companies facing high borrowing costs rises sharply for bonds trading above a 10% overall yield. More than 8% of the US high-yield bond market is now above this level.
“The weakness is widening,” he said. “It tells you that at the margin, it’s not just a rate issue, it’s also a credit issue. There aren’t many companies that can fund north of 10% for an extended period.