The commodities crunch is sparking problems in another market – junk bonds. US raw materials groups, ranging from Peabody Energy to small miners and steel companies, issued high-yield debt this year. Now those bonds have racked up big losses, says Wolf Richter on wolfstreet.com.
The value of bonds issued by Peabody in March has halved in four months. It’s a nasty shock for yield hunters, and it could get a lot worse. US junk yields are still historically low (ie, prices remain high), barely above levels seen during 2013’s “taper tantrum”.
So there is ample scope for yields to shoot up, as they did in the global crisis – as the chart shows. To make matters worse, the size of the junk market has doubled in recent years as companies have issued ever more debt to yield-hungry investors. Jitters in junk could spread to the equally bubbly mainstream corporate bond market, where debt has also reached record levels. “The fire starts at the riskiest margin and works inward.” Watch this space.