As anxiety over an economic downturn creeps higher, investors have been avoiding one of the riskiest markets for corporate debt. The amount of extra yield, or spread, investors demand to hold company debt rather than safe government debt has jumped since March by 0.62 percentage point for triple-C-rated company bonds versus a 0.07 percentage point decrease for junk debt with higher double-B ratings. Bond yields rise when prices fall. The trend is concerning because it contrasts with the fresh records in stocks and the widespread hunt for yield that has fueled a worldwide rally in bonds. It’s also troubling because companies with the lowest bond ratings are typically the most vulnerable to the effects of an economic downturn. The moves are also important because they send a different signal than the more stable spreads paid by companies with better bond ratings. Investors view credit spreads as an important indicator of the health of the U.S. economy and the corporate sector in particular. Given the limited upside potential of bonds—which in a welcome scenario are repaid in full at maturity—debt investors have a reputation for being sensitive to risks and changes in the economy. Investors are closely watching for signs of weakness in corporate bonds because the U.S. government-bond market has started sending signals that the economy could be heading for a recession. For many weeks, the yield on three-month Treasury bills has exceeded that of the benchmark 10-year Treasury note by as much as 0.259 percentage point, the most since May 2007. Investors watch the dispersion between yields on short- and longer-term Treasurys, known as the yield curve, because shorter-term yields tend to exceed longer-term ones before recessions. That phenomenon is known as an inverted yield curve. “Investors are very much looking at” signals coming from Treasury yields and are starting to assess high-yield bonds in that context, said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors LLC. “The market is right to be focused on the bottom of the rating scale.” Tracy Chen, a bond manager at Brandywine Global Investment Management, sold the triple-C rated debt in her portfolio this year betting that the persistent economic drag of trade tensions with China would make it more risky to hold the securities. The decelerating economy in the U.S. “is definitely worrying, especially if you look at the slowdown in China,” Ms. Chen said. How have you adjusted your positions in bond markets recently? Let the author know your thoughts at daniel.kruger@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |