Companies around the world sold an unprecedented number of speculative-grade bonds in the first half after borrowing costs fell to record lows, raising investor interest in the risk.
Issuers placed more than $ 535 billion in speculative-grade bonds in all currencies, the highest amount on record in any half and a 49% increase from the prior year, according to data compiled by Bloomberg. Junk bond yields in the United States fell to a record low this week and borrowing costs for riskier euro companies are not far off.
With high-yield bond valuations in many regions already under pressure as the Federal Reserve is pushing forward its projections of when it could raise rates, investors are left with a small cushion against losses in the event that the Federal Reserve is higher borrowing costs begin to affect the cash flows of weaker companies.
Concerns are also growing about the consequences of debt stresses in some parts of the world. China Evergrande Group, Asia’s largest seller of junk dollar bonds, recently downgraded the perception of some high-yield debt from the region, after authorities took more steps to curb excessive leverage.
Until now, those risks have not been a major deterrent to the junk debt market around the world. A rebound in the global pandemic economy, fueled by extensive administration of vaccines in many developed nations, has attracted investors, at a time when yields on top-rated corporate debt have also fallen.
“The momentum of GDP growth should underpin investment in risky assets,” said Todd Schubert, head of fixed income research at Bank of Singapore, who sees the potential for the current junk trend to continue into the second half. Additional junk bond spreads on investment grade instruments also provide investors with more protection against the adverse impact of any future rate hikes amid inflationary pressures, increasing their appeal, he said.
That is in contrast to higher rated debt. Spreads on US investment-grade bonds this week adjusted to their lowest level since 2005, at around 80 basis points, giving investors little room to absorb a potentially faster-than-expected rise in inflation or a rise in inflation. faster pace of rate hikes by the Fed.
Record U.S. junk bond yields have not dampened demand for high-yield bonds from large investors, which, as of Wednesday, had helped propel issuance to more than $ 238 billion so far this year. . That’s an all-time high for a first half, dwarfing the supply of about $ 210 billion during the first six months of 2020, according to data compiled by Bloomberg.
That frenetic pace may also be on its way to pick up even more. Bank of America analysts expect junk bond issuance to hit a record $ 500 billion this year, driven in part by the growing prevalence of large leveraged acquisitions, strategists led by Oleg Melentyev recently wrote.
