Markets
US junk-bond risk premiums hit a 17-month high as October high-yield sales slump to about $7 billion
The high-yield spread jumped 13 basis points in a day, more than $5 billion of debt sales have been postponed this month and yields on the lowest-rated bonds are at multi-year highs.
HedgeWeekly News Desk ·
The extra yield investors demand to hold US high-yield corporate bonds rose to its highest level in 17 months this week, Bloomberg News reported on October 24, as a sell-off in the riskiest debt spilled into the new-issue market. The ICE BofA US High Yield Index option-adjusted spread widened to 3.40 percentage points on October 22 from 3.27 the previous day, a 13-basis-point move in a single session, according to data published by the Federal Reserve Bank of St. Louis.
Primary markets have largely shut. US junk-bond sales came to about $7 billion in October as of October 21, against $51 billion in September, and at least seven issuers have postponed more than $5 billion of US and European debt sales this month, the biggest run of delays this year, Bloomberg reported. Deals pulled include AVI-SPL's $690 million leveraged loan and a €3 billion refinancing for European telecom network contractor Circet, while Radiology Partners dropped a $485 million acquisition loan and plans to sell junk bonds instead.
The pain is concentrated at the bottom of the ratings scale. Yields on B-rated junk bonds reached an 18-month high of 8.39% on October 20 and CCC-rated yields touched a four-year high of 15.7%, according to Bloomberg data. Credit funds are feeling it: London-based Arini Capital Management, one of the larger high-yield investors, reported a 6.9% loss in the first half of October, Bloomberg said, after its flagship fund fell an estimated 15.7% through September, according to Financial Times figures cited by Hedgeweek.
Why it matters: Bloomberg linked the sell-off to higher oil prices tied to the Iran war and renewed inflation pressure, and Moody's head of US leveraged finance, John Puchalla, said higher rates add stress for the most heavily indebted borrowers. With new issuance stalled, leveraged companies that need to refinance face either higher coupons or a wait, and distressed-debt managers face mark-to-market losses before any recovery. Funds and allocators should watch the Federal Reserve's October 27-28 meeting, the next St. Louis Fed spread update due October 26, and whether postponed deals such as Circet's return to market before year-end.
Sources
- Bloomberg Law (Bloomberg News): 'Total Meltdown' in Riskiest Debt Unnerves Market: Credit Weekly
- Advisor Perspectives (Bloomberg News): Surging Yields Bring Biggest Spate of Debt Sale Delays This Year
- FRED, Federal Reserve Bank of St. Louis: ICE BofA US High Yield Index Option-Adjusted Spread
- AlphaMaven (summarising Hedgeweek): Arini fund down 16% as troubled debt bets sour
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