Investors' search for profit is taking them to new, uncharted levels of risk as bond yields plunge. This could have negative implications for bonds, stocks and the economy at large, as outlined in a recent Barron’s story.
A record amount of global debt with negative yields and the prospect of rate cuts has led investors to rush to junk bonds for their super high yields, buying up junk-rated companies.
Lower Rates Boost Risky Assets
On Monday alone, 7 high-yield companies sold a collective $4 billion in bonds. These firms included NextEra Energy (NEE), Post Holdings (POST) and Icahn Enterprises (IEP). Higher than expected demand for those sales prompted the underwriters in two of the offerings to increase the size. The day following, six additional high-yield bond sales amounted to a whopping $2.9 billion.
“We would expect a Fed cut to boost risky assets, including high yield bonds,” wrote Citigroup strategists in a recent note, per Barron’s.
These debt-laden companies could get crushed in the economy slips into a recession, hammering their stock prices. Meanwhile, the details of the bond sales themselves demonstrates a more bearish sentiment that is growing among investors who are increasingly wary of the end of a decade long bull cycle.
“We are deeper into the credit cycle, with increasing leverage on corporate balance sheets and fewer safeguards to protect against a worsening backdrop,” the Citigroup strategists wrote.
Out of the recent bond sales, roughly half were from companies with investment grade ratings (BB+, BB, BB-), which none were from companies with the lowest credit rating (CCC+, CCC, CCC-). Only one of the sales came from a company preparing for bankruptcy.
The companies that sold bonds earlier this week indicated that they were doing so to refinance short-term debt. While the details of the firms’ leverage-reduction plans differed, this refinancing means that they will not need to generate as much cash flow over the next few years.
Charter Communications (CHTR) recently raised $500 million for general corporate purposes, which may include paying down debt or executing stock repurchases. William Lyon Homes (WLH) raised $300 million to redeem notes due in 2020.
Barron’s notes that in general, it’s not high-yield firms that are upping their leverage -- a sign that investors are concerned that a dovish Fed will not offset an economic downturn.