Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., November 8, 2017. REUTERS/Brendan McDermid
November 10, 2017
By Richard Leong and Trevor Hunnicutt
NEW YORK (Reuters) – Cracks in the red-hot U.S. high-yield bond market are starting to widen, with two junk-rated companies pulling their deals on Friday and U.S.-based high-yield funds suffering their second consecutive week of cash withdrawals.
“Folks have become super negative on risk all of a sudden,” said Greg Peters, managing director and senior portfolio manager at PGIM Fixed Income.
On Friday, coal producer Canyon Consolidated Resources became the second junk-rated company to pull a bond sale this week amid a bout of volatility in credit markets. NRG Energy pulled its junk bond offering on Thursday as spreads across the asset class widened sharply and the two main junk bond ETFs reached seven-month lows.
With the yield curve at its steepest level in over a week a day after it touched its flattest level in a decade, those junk bond ETFs recovered.
The U.S.-listed, $19 billion iShares iBoxx $ High Yield Corporate Bond ETF rose 0.22 percent at $87.11, while the $13.1 billion SPDR Bloomberg Barclays High Yield Bond ETF, gained 0.47 percent at $36.68.
Both funds shed about 1.0 percent on the week, for their steepest drop in three months.
Investors pulled $621.9 million from U.S. junk portfolios in the latest reporting week, following outflows of $1.2 billion the previous week, according to Lipper data.
(For a graphic on ‘U.S. Junk Bonds Hit Bump’ click http://reut.rs/2ztAAVi)
Bank of America Corp analysts said in a note on Friday that volatility in high-yield has been “driven primarily by a confluence of several meaningful and yet only loosely related events,” including the collapse of the Sprint Corp and T-Mobile U.S. Inc merger, the U.S. Justice Department’s challenges to the AT&T Inc and Time Warner Inc merger, a credit downgrade for Teva Pharmaceutical Industries Ltd and other industry-specific news along with the potential for tax reform to be delayed.
“The impact on related (high yield) names has been significant enough to cause a market-wide reaction,” they wrote.
“Only a dozen names in the index have been responsible for half of HY index widening so far this week.”
The analysts also said the flatness of the yield curve has been hurting high yield, partly by hurting bank stocks, which benefit from a steeper yield curve that allows them to borrow cheaply, lend at higher rates and profit from the difference.
(For a graphic on ‘U.S. yield curve turns flattest in a decade’ click http://reut.rs/2zl9BLI)
The junk bond ETF sell-off was “meaningful,” the Bank of America analysts said, “but not extreme moves by the standards of this asset class.” “Overall, we find a modest correction to be both natural and welcome in the context of the relentless tightening in (high yield) spreads we have seen so far this year, and over the past two months in particular.”
(Reporting by Richard Leong and Trevor Hunnicutt in New York; Editing by Jennifer Ablan and Tom Brown)