Junk-bond bubble hisses air

In the past few years, yield-starved investors have stampeded into high-yield corporate debt. But junk bonds aren't looking so attractive anymore.

In the past few years, yield-starved investors have stampeded into high-yield corporate debt (junk bonds). Now, they've become "decidedly more concerned about credit risk", says Bank of America Merrill Lynch (BAML), and are stampeding out again. In the week to 22 January, global investors pulled almost $5bn out of speculative-grade debt funds. The yield on the BAML high-yield index has jumped to almost 10%, a near-six-year high, while a similar index of the riskiest junk now yields 20%, a post-crisis high. The average yield on corporate debt worldwide is over 9%, a six-year peak.

What's gone wrong? The main problem is the energy sector: during the shale boom, small oil explorers gorged on debt. With oil prices now plunging, they are struggling to keep up with their payments. According to credit-ratings agency Standard & Poor's, more than half of junk-rated US energy groups are "distressed" in other words, deemed at risk of default. It's not just oil: S&P says more than 70% of American metals, mining and steel firms are distressed too.

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Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.