NEW YORK (AP) – Oil’s slump didn’t just hit the stock market, it’s shaken up the junk-bond market, too.
High-yield bonds are on track for their worst drop in a year and a half after investors dumped risky securities issued by energy companies. Those bonds make up about 13 per cent of the category.
The Barclays US high-yield corporate bond index, a benchmark for the securities, has dropped 2.5 per cent this month, after a 1.4 per cent drop in November. If the index were to end December at that level, it would mark the biggest two-month slump since June 2013.
By comparison, a broader Barclays index tracking the entire bond market, which includes corporate bonds with better credit ratings and Treasurys, is largely unchanged over the same period.
Junk bonds pay higher interest rates than US government bonds and other kinds of corporate debt because they are considered at greater risk of defaulting on their debt. That’s because the companies that sell them generally have high amounts of debt in comparison to their income.
The debt has been a favorite for investors who wanted higher levels of income. For energy companies trying to rapidly expand during the US oil and gas boom, the junk-bond market had offered a way to bankroll their operations, even if they had weak credit.
Investors are now worried that a near 50-per-cent fall in oil prices will make it harder, if not impossible, for these companies to generate enough earnings to repay their debts. The market, which had an extremely low rate of defaults when oil traded around $100 a barrel earlier this year, is now looking much riskier with prices below $60.
It’s not just energy company bonds that are falling. The slump in those bonds has made investors re-evaluate their other holdings of other high-yield bonds.
“You are starting to see energy and energy-related companies that have really re-priced in the last month, and that has weighed down on the market,” said James Keenan, head of Americas credit at BlackRock. In the past week, you’ve seen “more pressure on other parts of the market”.
The market for risky debt was already on shaky ground this summer. With the Federal Reserve keeping its benchmark interest rate close to zero for more than six years, investors had been hunting for higher rates.