The amount of double-digit yielding debt for investors to choose from in the US junk bond market has swelled over the last six months as higher borrowing costs and a weakening economy weigh on credit quality.
(Bloomberg) — The amount of double-digit yielding debt for investors to choose from in the US junk bond market has swelled over the last six months as higher borrowing costs and a weakening economy weigh on credit quality.
Bonds yielding at least 10% grew by about $45 billion to $325 billion, or about 30% of the speculative-grade index, according to Bloomberg Intelligence analyst Mike Holland. Almost $139 billion of that lot come from the communications sector, which includes the likes of Altice USA Inc. and Dish Network Corp. As the highest-yielding junk sector, it trades at a yield-to-worst of 10.9%, up 100 basis points this year.
“You look at a slowing economy, rising rates — all of the common indicators of an imminent recession are starting to perk up,” he said in a phone interview. “A focus on resilience amid a volatile market environment is paramount.”
Higher funding costs have made credit more appealing after a two-decade period where benchmark rates were pinned near zero for long stretches, making it difficult for money managers to reap equity-like returns from the asset class. Now with the average blue-chip and junk bond yielding more than 6% and 9%, respectively, investors have been eager to park cash in fixed income.
Howard Marks, co-founder of Oaktree Capital Management co-founder told investors last week in a note published on the firm’s website how alluring corporate credit has become 18 months after the Federal Reserve began its historic interest rate campaign to tame inflation.
If higher rates are here to stay, “credit instruments should probably represent a substantial portion of portfolios … perhaps the majority,” the famed distressed investor wrote. He noted yields on junk bonds and leveraged loans are now comparable to the average annual return of about 10% in the S&P 500 Index over nearly 100 years.
Read More: Oaktree’s Marks Urges Significant Allocation to Credit vs Stocks
–With assistance from Ye Xie.
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