The riskiest companies in the world are enjoying the benefits of the global hunt for higher returns, sending the yield on the dollar denominated debt of some of the lowest-rated businesses close to historic lows.
The average yield across US triple C rated debt in the US dropped to a recent nadir of 7.6 per cent this month, closing in on its all-time low of 7.3 per cent set in 2014, according to data from Ice Data Services. The drop in yield signals a rally in price for the assets.
This year’s rise in the price of bonds issued by the lowliest rated borrowers is a sign of how investors are willing to overlook the persistent spread of coronavirus and an uneven economic recovery.
Investors have instead focused on aggressive measures deployed by the US central bank last spring, including its move to begin buying corporate bonds, alongside dropping its main interest rate close to zero. Analysts say that the Federal Reserve’s actions underpinned financial markets and opened the floodgates for companies to borrow cash to outlast the pandemic.
Fund managers, unable to generate return buying safer government debt, have piled into corporate bonds, initially opting for higher-rated debt. As demand sent yields tumbling there as well, investors have progressively moved to dipping into lower-rated bonds.
“You basically have a Fed that is saying ‘We will not pull the rug out no matter how wild it gets’,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
It marks a dramatic reversal from the sell-off just less than a year ago, which saw yields on triple C rated debt rise to a high of more than 19 per cent.
Even companies most affected by the Covid-19 crisis have managed to issue debt this month: Life Time Fitness has issued a $475m bond and Viking Cruises, a $350m bond
“The risk-on tone continues in the new year,” noted Citi analysts this month.