The U.S. Junk-Bond Market Just Had Its Worst Week in 2 Years

February 10, 2018, 8:33 PM UTC

A selloff in the market for speculative-grade corporate bonds accelerated amid turmoil in the stock market, handing investors their worst weekly loss since the oil slump two years ago.

The bonds lost 1.5 percent on the week, the worst performance since February 2016, Bloomberg Barclays index data show. The average spread on high-yield bonds on Friday — or the premium investors seek to hold such notes instead of safer government debt — surged 0.23 percentage point, climbing to 3.69 percentage points.

The market had held up for much of the week as stock markets were hammered. But a relentless decline in exchange-traded junk-bond funds and an almost 10 percent decline in oil prices took their toll. That pressured the debt of energy companies, which still make up one of the biggest chunks of the $1.3 trillion junk-bond market, as well as bonds of health-care and communications companies.

Bonds of natural gas producer EP Energy Corp. slumped to levels typically considered distressed. Its $1 billion of notes due in 2025 dropped 6.625 cents on the dollar during the week to 71.5. That pushed the yield on the debt to 11.8 percentage points more than Treasuries.

Significant Discount

The weakness spilled over to companies seeking to issue new debt. Flexi-Van Leasing Inc. sold $300 million of second-lien notes at a significant discount with strengthened protections for investors. Borrowing less than the face value of the debt, known as original-issue discount, reduces proceeds for the company while increasing the yield for investors.

Apex Tool Group LLC, a manufacturer of hand and power tools, had to offer investors a 9.001 percent yield — at the top of an initially discussed 8.75 percent to 9 percent range — to sell its $325 million issue. The company is also marketing a loan sale, with commitments due Monday.

Many bond fund managers said Friday they don’t see the weakness persisting. Yields are still well below long-term averages and default rates are expected to stay low. Sooner or later, they said, investors will start seeing bargains.

“There’s fundamentally no reason to see spreads break down,” said Margaret Patel, a senior portfolio manager at Wells Capital Management who oversees $1.5 billion in assets.

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