Steer clear of oil junk bonds

“Good news for the US oil industry,” say Ed Crooks and Eric Platt in the FT. The oil exporters’ cartel, Opec, has agreed to cut production, and has therefore stopped trying to put US shale producers out of business by flooding the market to keep prices low. Oil prices have risen and sentiment has improved across the US energy sector.

High-yield, or junk, bond sales from oil producing firms almost came to a complete halt earlier this year, and they reached a 12-year low. But they are now “tentatively re-emerging”. Oil equities have bounced and the average yield on junk energy bonds has fallen back to around 7%, the lowest figure since late 2014, from a peak of 21% in February.

But while energy companies may be in much better shape, having trimmed their costs by about 40% in two years, their revival in the junk-bond market is merely inflating a massive bubble further. Yields in the overall junk-bond market have slid so far that bond veteran Martin Fridson reckons the market “is more overvalued than at any time since the financial crisis”, says Bloomberg.com’s Sally Bakewell. Steer clear.