Advertisement

Beware a credit bubble in junk bonds

With yields on junk bonds at record lows, it won't take much to wreck the party.

While equities have clambered back to record highs, the credit markets have been on fire too. Take junk, or high-yield bonds. As prices for these riskier bonds have soared, yields have fallen to record lows.

The Bank of America Merrill Lynch Global High Yield Index shows that yields fell below 6% this spring, an all-time low, and are currently around 6.4%. The record high of December 2008 was 23.2%.

Advertisement - Article continues below

Volumes "have gone through the roof", says Arnaud Tresca of BNP Paribas. Last year global high-yield issuance jumped 38% to $397bn. This year bond issues are likely to trump that figure. Companies are keen to raise cheap money from investors or refinance their debts.

Chalk the boom up to cheap money, says Ben Marlow in The Sunday Times. Record-low interest rates and money printing have left the financial system with lots of easy money but "a dearth of places to find good returns". So investors desperate for yield are snapping up risky firms.

The upshot is a return to irrational exuberance: investors are accepting the risk of junk bonds but the interest rates typical of government bonds before 2007.

Default rates are currently low, because yield-hungry investors are keeping dodgy firms alive by snapping up their debt. The Fed's decision to delay tapering has cheered the markets and kept the party going.

But with yields so historically low, there seems scant scope for further gains and any rise in interest rates could send default rates up fast, bursting this "epic credit bubble", says Joseph Baratta of Blackstone. Investors beware.

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/511283/investors-are-going-bonkers-for-bonds
Bonds

Investors are going bonkers for bonds

In a further sign of the mania gripping the bond market, Germany issued €3.15bn of zero-interest ten-year bonds last week.
18 Jul 2019
Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020
Visit/economy/global-economy/601562/collateralised-debt-will-it-be-2008-all-over-again
Global Economy

Collateralised debt: will it be 2008 all over again?

Collateralised debt obligations (CDOs) triggered the 2008 financial crisis. Now we have CLOs, or collateralised loan obligations – securitised busines…
26 Jun 2020

Most Popular

Visit/economy/inflation/601584/the-end-of-the-bond-bull-market-and-the-return-of-inflation
Inflation

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020
Visit/investments/commodities/gold/601587/bullish-gold-price-cup-and-handle-chart-pattern
Gold

This chart pattern could be extraordinarily bullish for gold

The mother of all patterns is developing in the gold charts, says Dominic Frisby. And if everything plays out well, gold could hit a price that invest…
1 Jul 2020
Visit/economy/global-economy/601579/how-pent-up-demand-could-drive-a-v-shaped-economic-recovery
Global Economy

How “pent-up demand” could drive a V-shaped economic recovery

“Pent-up demand” is usually a myth. But not this time. The Covid lockdown has created genuine pent-up demand, says Merryn Somerset Webb. That’s now be…
29 Jun 2020