US junk-bond yields drop below 4% for the first time ever

By Carolina Gonzalez

The average yield on U.S. junk bonds dropped below 4 per cent for the first time ever as investors seeking a haven from ultra-low interest rates keep piling into an asset class historically known for its high yields.

The measure for the Bloomberg Barclays U.S. Corporate High-Yield index dipped to 3.96 per cent on Monday evening, making it six straight sessions of declines.

Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.

The lower yields should encourage more speculative-grade companies to tap the market after raising more than $7 billion last week. January was a record month for sales with $52 billion priced, and year-to-date volume stands at about $60 billion.

US junk-bond indexBloomberg

Buyers have been snapping up CCC graded issues as yields for that slice of high yield also decline. They dropped to 6.21 per cent on Monday, also a record low, and have outperformed the rest of the market for three consecutive months, according to data compiled by Bloomberg. Notes rates in the single-B tier yield an average 4.30 per cent, while those in the BB range yield 3.05 per cent, the data show.
Issuance conditions have been so conducive that some of the riskiest types of transactions come to market, such as bonds that are used to fund dividends to a company’s owners and so-called pay-in-kind bonds that allow a borrower to pay interest with more debt.

Some see continued outperformance from the junkiest part of the market. CCCs, which have accounted for a significant chunk of recent supply, may be one of the best parts of credit this year, according to David Norris, head of U.S. credit at TwentyFour Asset Management. “This robust new issue pipeline of lower-quality credit is worth poring over as there are likely to be some good stories in here for investors with sufficient liquidity to get involved,” he said.

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