IIn the United States, the bonds of financially weak companies are again very popular. According to the data provider Ice Data Services, a unit of the exchange operator Intercontinental Exchange (ICE), high-yield bonds, the so-called high-yield bonds, generated the highest return since July 2011. As the Financial Times reported, rising prices combined with falling yields have resulted in a return of 4.78 percent in this asset class in the past month.
As a result, investors are again accepting higher risks, even though the corona crisis in the United States has far from subsided. In addition, many companies with poor creditworthiness (ratings below “BBB–”) risk facing payment difficulties if strict quarantine measures are taken again in the American states and parts of the economy are paralyzed.
Chesapeake Energy, a pioneer in the fracking of shale oil and gas, had to apply for creditor protection at the end of June. Shale gas producers were particularly hard hit by the fall in oil prices in the spring. The fact that investors are not deterred by the risk of bankruptcy is due to the very low interest rates. American bonds from companies with a good investment-grade rating are currently dropping less than 2 percent.
Risk premium drops significantly
The yields on high-yield bonds, which are also referred to as “junk bonds” on the market, have fallen again. In July, the average return, measured by the ICE BofA US High Yield index, fell from 6.85 to 5.46 percent. Nevertheless, these titles can still achieve a return that is 3.5 percentage points higher than those of companies worth investing in.
Investor confidence is also based on the expectation that the US Federal Reserve (Fed) will continue to provide the economy and financial markets with generous liquidity. The high yield bond market in particular has long worried her because the danger of speculative exaggeration has been recognized here. In the wake of the corona crisis, the Fed also began to support the high yield market by buying exchange-traded index funds (ETFs) from this asset class.
Previous year’s volume far exceeded
The American high yield bond market has a volume of $ 1.5 trillion. 14 percent of this is accounted for by energy companies, especially shale oil frackers. The demand from investors is accompanied by high emission activities. By the end of May, US $ 153 billion high yield bonds had been issued. This exceeded the previous year’s volume by 69 percent.
Nevertheless, rating agencies warn of the increased risk of default. According to Fitch, the default rate of US high yield bonds rose to 5.5 percent in July. This is the highest level since May 2010. The risks of high-yield bonds are also increasing in Europe, where the market is not even half as big as in the United States. According to Fitch, the failure rate here was 2.4 percent in July. The credit rating experts expect an increase to 5 percent by the end of the year.
Companies that are particularly affected, such as tour operators, are particularly affected by the Corona crisis and the quarantine measures. Increasing emissions can also be observed in Europe. According to Fitch, these accelerated further in June, which means that an annual volume of 108 billion euros can be expected if the trend continues. The corona effect would thus be rather small, because in the previous year the issue volume was only slightly higher at 112 billion euros.
In Europe, loans to financially weak companies, so-called leveraged loans, are more important than high-yield bonds. Last week, the EU banking regulator Eba warned of these credit risks. The high concentration of leveraged loans in a few institutes is causing concern. In a group of 26 banks, these totaled EUR 400 billion, which corresponds to 2.5 percent of the balance sheet total.